In a decision of 15 September 2020 (Nr. 2019/AR/579), the Court of Appeal in Antwerp provides some further clarification on the concept of ‘tax relief’ as stipulated in the double taxation agreement (DTA) between Belgium and the United Arab Emirates (UAE)
Since Belgian tax residents are required to report their worldwide earnings in Belgium, there is always a risk of earnings being taxed twice. The fact that you are taxable on your worldwide income does not necessarily mean that you will actually be taxed on it in Belgium. In a cross-border context, you first need to look at the relevant DTA to determine which country is authorized to tax an income component. Subsequently, the domestic tax law of that country is applied to determine the tax due.
Under the many DTAs that we have concluded, Belgium generally provides relief from double taxation through a combination of the ‘exemption with progression’-method (for active income) and the credit method (for passive income). This ‘progression’-rule means that you will not pay any Belgian income tax on your (exempt) foreign income, but it will increase the average tax rate that applies to your other income taxable in Belgium. The more exempt foreign income you have, the higher the tax will be on your income that is effectively taxed here.
In order for the authorities to grant you tax relief in Belgium, such foreign income: (i) should be subject to tax in the source state, regardless of the nature, form or amount of tax due there, (ii) and it may not benefit from any tax exemption in the source state either. Basically, you need to demonstrate that your earnings have been taxed abroad before Belgium will allow them to be exempt here.
In this respect, the DTAs can be divided in three categories; they either use the term ‘taxable’, ‘taxed’ or ‘effectively taxed’. Although there is no uniform understanding of the term ‘taxed’, in most countries the term is interpreted as ‘effectively taxed’, i.e. either tax must actually be paid or, at least, the income concerned must be included in the taxable basis.
Is it sufficient if an income is in principle subject to tax, irrespective of whether such income is explicitly exempt under domestic law in the source state, remains de facto untaxed or has indeed been subject to the standard tax rate?
In a recent decision, the Court of Appeal in Antwerp investigated the situation where a Belgian tax resident earned fees in his capacity of a member of a board of directors of a company in Dubai. These board members often also have other functions within the company, e.g. as ordinary employee, adviser, consultant, etc. However, it is not clear from the court decision if this was also the case here.
Both taxpayer and tax office referred to Article 16 BE-UAE DTA, which stipulates that only the UAE has the right to tax director’s fees paid out by a UAE company to a Belgian tax resident. The reason for this is that it is often difficult to ascertain where the management services have exactly been performed, therefore the services are normally considered to be performed in the country of residence of the company. On this basis, the director claimed tax relief in Belgium and asked for a tax exemption in his tax return.
The BE-UAE DTA provides in Article 23 that Belgium must provide tax relief under the ‘progression’-method in case the earnings have been ‘taxed’ in the UAE. The court concluded that the director’s fees cannot benefit from any tax exemption in Belgium for the simple reason they have not actually been taxed in the UAE. The court also reminds us that the purpose of a DTA is not only to avoid double taxation, but also (unintended) double non-taxation.
According to the court in Antwerp, ‘subject to tax’ means that an income is subject to the domestic tax system in force, which result in such income either being taxed or exempt, which is not the case in the UAE. The court concluded that income of private individuals is not effectively taxed in the UAE due to the absence of a personal income tax system, therefore no (double) tax relief should be granted. This ruling is in line with the tax authorities’ administrative instruction of 5 October 2009 (Nr. AFZ 14/2009) and 6 April 2010 (Nr. AFZ 4/2010).
We need to point out that the Belgian tax authorities’ approach is not always consistent. In the case where a Belgian company had the intention to open a sales office in the UAE, the company applied for a tax ruling to understand whether the (untaxed) profits generated in the UAE would be eligible for tax relief in Belgium (Tax Ruling Nr. 800.465 dd. 17.02.2009).
The tax authorities confirmed that these earnings are indeed subject to their own tax regime in the UAE but that no taxes are currently levied. There is no uniform tax regime in the UAE at a federal level. The various emirates have introduced similar tax regimes by decree. Based on these Tax Decrees, permanent establishments of foreign companies engaged in commercial or industrial activities in the UAE are in principle subject to income tax at progressive tax rates of up to 55%. However, they do not actually pay these taxes in the absence of the required Tax Decrees, with the exception of foreign oil companies and branches of foreign banks.
The Ruling Commission also explicitly stated that that an effective taxation of the income is not a requirement for such income to be exempt in Belgium. “The terminology used in Article 23 DTA ‘only implies a ‘subject to tax’ requirement and not an actual taxation”, the Commission stated. In this case the Ruling Commission interpreted the ‘subject to tax’-requirement and concept of ‘tax relief’ differently than the Court of Appeal in Antwerp.
Update: On 25 June 2021 (Decision Nr. F.18.0112.N), the Belgian Supreme Court also explicitly confirmed that if the director fees have not been effectively taxed in the UAE, which is the case if they are not subject to any taxation regime there, they may still be taxed in Belgium.