Belgian case law on ‘pension tax adjustment’ for international civil servants
• Tax adjustment method
As pensions paid out to retired personnel of international and European organizations are normally not exempt from national taxes, the use of the so-called ‘adjustment method’ aims to compensate for this loss of income. The Organization will compensate the fact that salaries itself are in general exempt from income taxes, while pensions are traditionally not.
Many international organizations know some type of ‘tax adjustment’ system, but not all of them apply the same method (e.g. United Nations, Worldbank, OECD, NATO, etc.). The most common approach is to keep the base salary as the pensionable remuneration, but on top of that provide a full or partial reimbursement of the national taxes that will be due in the respective Member State, in addition to the pension.
The relevant pension scheme of the Organization will further specify how the pension is calculated depending on the country where the employee was posted, but in addition to that will also include an adjustment depending on the Member State in which the pension is subject to income tax under the applicable tax legislation in that State.
As a general rule, the tax adjustment will normally equal 50% of the amount by which the beneficiary’s pension would theoretically need to be increased, in order for the remaining amount (after national income taxes) to correspond to the occupational pension as initially calculated by the organization. In other words, the compensation will be around 50% of the tax that you might expect to pay if the pension was your only source of income.
• Belgian tax court analysis
In the past, several Belgian courts have taken position on the tax treatment of the pension tax adjustment received by former employees of the European Patent Office (EPO) and whether this ‘partial compensation’ is to be considered taxable pension in the meaning of the Belgian Income Tax Code (cf. Court of Appeal Ghent dd. 2 June 2015 (Nr. 2013/AR/2526), Court of Appeal Antwerp dd. 3 October 2017 (Nr. 2015/AR/2607), Court of First Instance Liège dd. 26 April 2018 (Nr. 16/6037/A).
The EPO is the executive arm of the European Patent Organization and is in charge of studying European patent applications, filed by applicants, in order to decide whether to grant a patent for an invention. There is also an Administrative Council that acts as its supervisory body and, to a limited extent, as its legislative body. The EPO has its headquarters in Munich (Germany), but also has an office in Brussels close to the European Institutions.
The Administrative Council consists of representatives of the Member States and is competent to regulate the status, allowances and pensions of EPO staff members, according to Article 33 of the European Patent Convention of 5 October 1973.
Article 16 (1) of the Protocol on Privileges and Immunities of the European Patent Organization states that EPO staff members shall be subject to an internal tax on the salaries and emoluments paid by the Organization, and that this income shall be exempt from national income tax. Article 17 of this Protocol further stipulates that the Administrative Council decides the categories of employees to whom the provisions of Article 16 apply.
As a result of this, the Administrative Council has adopted an Internal Tax Regulation that stipulates the conditions under which the salaries and emoluments of the EPO employees shall be liable to tax (Decision CA/D nr. 13/77). Article 3 of this regulation states that “The tax shall be due in respect of the total remuneration, emoluments, benefits, allowances, including invalidity allowance, and partial compensation received from the Office by those liable to taxation”.
Several Belgian tax courts have therefore concluded that the pensions tax adjustment (‘partial compensation’) is subject to an internal taxation of the Organization, and therefore qualifies as an ‘emolument’ in view of Article 16 (1) of the above Protocol (although listed there as a separate category). Consequently, it should be exempt from national (Belgian) income taxes.
The courts also pointed out that the calculation method of the tax adjustment cannot lead to the conclusion that the adjustment itself should be subject to national income tax. Also, the fact that Article 16 of the Protocol mentions the word ‘and’ between ‘salaries and emoluments’, does not imply that ‘emoluments’ only refer to active staff members of the Organization. The Court of Appeal in Antwerp concluded that this article also refers to former staff members.
While this was probably not the intention of the Antwerp Court, this reasoning opens the door in our opinion that not only the ‘tax adjustment’ itself, but also the international pension could be covered by Article 16 (1) and should therefore be exempt from national income tax, although this will probably be a topic for another discussion.
• Tax adjustment not subject to Belgian income tax
Finally, it is important to mention that the sole purpose of the ‘tax adjustment’ is to equalize the tax burden of the Member States on pensions, and not to grant an additional pension. The adjustment serves a different purpose than a pension and does not fall under the EPO pension regulations.
Although the above argumentation of the Belgian courts was in the context of the tax adjustment received by former staff members of the European Patent Office, the reasoning could in our opinion be extended to the tax adjustment granted by other international and European organizations as well.
• Belgian Supreme Court has a different opinion
The above-mentioned decision of the Court of Appeal in Antwerp dd. 3 October 2017, was apparently challenged before the Supreme Court afterwards, who recently came to a different conclusion (Cass. 13.02.2020, Nr. F.18.0028.N/1). The Court explicitly stated that the ‘tax adjustment’ is indeed a pension and not an emolument in the meaning of Article 16 (1) of the Protocol.
The case has afterwards been referred to the Court of Appeal in Brussels who will now have to take position again on the matter. We should not expect any definitive answer on this for another year or so.