Belgian tax residents are required to report their worldwide earnings to the tax authorities, including foreign investment income (e.g. interest and dividends). Even if this foreign income has already been taxed abroad, they are to be declared and taxed again in Belgium.
Practically all double tax treaties (DTT) currently in force in Belgium provide both a withholding tax (WHT) at source abroad and an additional income taxation in Belgium. In general, the DTT provides a legal basis for this type of ‘double’ taxation, but it also sets a maximum WHT that can be applied in the source country, the ‘preferential’ rate (usually 15% of the gross income). If your foreign bank or financial institution is not aware that you are a Belgian tax resident, it is possible that taxes are even withheld at a higher tax rate, the ‘domestic’ rate.
If tax is withheld at source on the gross investment income, the net amount (after the foreign WHT is withheld) must be reported in your resident tax return. This net income will additionally be subject in Belgium to a flat tax of 30%.
Recently, the Belgian tax authorities have issued an internal (unpublished) instruction which stipulates that taxes withheld at source are not always fully deductible (Instruction 2019/I/45 of 26 September 2019). The authorities state that in case a DTT is in place with Belgium, the deductible amount of foreign WHT may never exceed the ‘preferential’ rate as provided in the relevant DTT (even if a higher amount was withheld based on the domestic rate). And in case the domestic rate is lower than the preferential rate, only the actual amount withheld can be deducted for Belgian filing purposes.
For example, if an individual receives a gross dividend of €100 and a foreign WHT of 35% is deducted at source (100 – 35 = €65), the net dividend of €65 was normally reported and subject to tax in Belgium.
Due to the new guidelines, if the relevant DTT provides for a maximum WHT of e.g. 15% (100 – 15 = €85), the deductible amount is to be limited to the preferential rate of 15%. The taxpayer is then required to report €85 instead of €65 in his resident tax return in Belgium. For any amount withheld abroad above the maximum rate set by the treaty, the beneficiary will need to ask for a tax refund in the source country (in our example €20).
The recent Belgian tax authorities’ instruction is based on the rule that international law has priority over domestic law, but it is nevertheless questionable. The tax authorities are trying to tax a fictitious income, ignoring the fundamental principle that only income that the taxpayer has actually received can be subject to a taxation. This instruction is discriminatory and potentially in violation of EU law and Belgian tax law.