New Expat Tax Regime: important amendments
Since 2022, a new tax regime applies to ‘inbound taxpayers’ (employees and directors) and ‘inbound researchers’ (employees) that come to work in Belgium. The scheme allows for part of the foreign executive’s salary to be paid out as a tax-free expense reimbursement, which is obviously beneficial.
The new regime has been implemented in the Belgian Income Tax Code, which strengthens its legal basis (whereas the previous expat regime was only an administrative tolerance). Although it was the initial objective to make the new regime more straightforward and easier to apply than the old one, several issues came up already a few months after its introduction.
Before one can qualify for this favorable regime, both employer and employee need to meet certain conditions. We already made a general review when the new regime was first introduced, but quite a few uncertainties remained. A law published late December 2022 includes some important changes. The tax authorities provide further guidance on this in an administrative instruction of 4 January 2023 (Circular Letter Nr. 2023/C/6).
At the level of the employee, the regime basically applies to two categories of taxpayers:
- Executives and directors, directly recruited abroad or posted to Belgium within a multinational group, who earn an annual gross salary of at least €75,000 (not incl. the expat allowance itself). Above this threshold, the employee can receive a tax-free expat allowance that amounts to max. 30% of the gross salary with an absolute maximum of €90,000 per year.
- Researchers directly recruited abroad or posted to Belgium within a multinational group, who spend at least 80% of their time on researching activities, and who have a relevant degree or at least 10 years of relevant professional experience in their field.
The research activities must take place within one (or more) branch(es) of a company where this kind of research is done in a separate department. The focus here is obviously on researchers with a profile that is less easy to find on the Belgian labor market.
At the level of the company or employer, it is required that it concerns:
- a Belgian company or subsidiary (subject to Resident CIT)
- a Belgian branch or establishment of a foreign company (subject to Non-Resident CIT)
- an association (NPOs or NGOs) with legal personality as referred to in Article 1:6, §2 of the Belgian Code of Companies and Associations.
The specific category of International Non-Profit Organizations (INPOs) was initially overlooked by the Belgian legislator, but then added later via an amendment.
However, part of the non-profit sector remained outside the scope of the special tax regime. This was the case for Foundations and Public Benefit Organizations (instellingen van openbaar nut/établissement d’utilité publique). This omission was challenged before the Belgian Constitution Court in July 2022, after which both categories have been included in the meantime as well.
It is now sufficient that the employee or director is recruited abroad or posted from abroad to Belgium to (a branch of) a company or organization registered in the Belgian Company Register (Crossroads Bank for Enterprises). Foundations, International NPOs, both Domestic and Foreign NPOs, basically any entity that obtains a Belgian registration number, is now eligible to hire expats under the favorable tax regime.
Minimum salary requirement
Employees and directors need to earn a gross salary of at least €75.000,00 p.a. for their Belgian employment. This includes holiday pay, end-of-year premium, benefits in kind, bonuses, and other gratifications, but not severance pay, replacement income or any costs proper to the employer (incl. tax-free expat allowance itself).
The minimum threshold must be met every year without any exception. If the employee fails to comply in a given year, this will immediately result in losing the expat status (‘sudden death’ principle), not only for that year in question, but also for any future years. This will have significant financial implications for both employee and employer, as additional payroll tax and social security contributions would suddenly be due.
For new hires, it is perfectly possible that the initially agreed salary exceeds €75,000.00, but that it cannot be reached during the first year of employment. This may be the case, for example, because the employee is not entitled in the first year to a full holiday pay, performance-related bonus or end-of-year premium. Difficulties can also arise for variable remuneration that is conditional in nature and can therefore not be correctly estimated when applying for the expat status.
The minimum salary of €75,000 is also quite high compared to similar expat regimes in our neighboring countries. While it was the legislator’s intention to significantly reduce the number of employees eligible due to the old regime being ‘overused’, we believe the current conditions are too restrictive.
The law published in December 2022 clarifies that only salary taxable in Belgium must be considered for calculating the minimum threshold. This has important consequences for ‘inbound’ employees and directors that are also required to work abroad in respect to their Belgian employment contract.
In case there is a double tax treaty between Belgium and the country where the work is performed, the salary paid for the activities abroad may be included to calculate the €75,000 threshold. However, if the same double tax treaty makes the foreign activities taxable abroad (and potentially exempts this income in Belgium), the salary should not be included for the purpose of assessing the minimum salary.
Furthermore, it is also required that such salary cost is borne by the Belgian company. In other words, only remuneration paid for services that generate taxable income in Belgium can be taken into consideration.
Max. 30% (recurring) expense reimbursement
The tax-free expense reimbursement itself can amount to 30% of the annual gross salary with an absolute maximum of €90,000 per year. This amount will be indexed as of 2024.
Also, for this purpose, salary may be interpreted as remuneration that is (i) taxable in Belgium; and (ii) imputed to the results of or borne by the employer concerned. In this context, this is also relevant for ‘inbound’ researchers.
It is also required that the 30% allowance is contractually provided for, which means that that it should be explicitly mentioned in the Belgian employment agreement. If the contract has already been agreed and signed, it could be an option to afterwards add the required contractual clause and salary adjustment via an addendum to the initial contract.
It should be noted that the 30% expat allowance, paid on top of the salary, de facto amounts to only a 23% allowance, calculated on the total remuneration package. If the gross salary package amounts to, let’s say, €100,000, the maximum exemption does not equal €30,000 (€100,000 x 30%), but only €23,076.92 (100,000 / 1.3 x 30%). In this respect, the reference to a ‘30%’ allowance is essentially misleading.
No cap for non-recurring expenses
Not all types of expenses, related to the international assignment, are included in the 30% lump sum. Some costs can still be reimbursed tax-free to the employee, above the 30% threshold:
- Costs arising from the employee’s move to Belgium
This includes the cost of a single trip to Belgium to find a new residence. It also includes temporary hotel expenses, but these are limited to a maximum period of 3 months.
- Costs related to furnishing the new home in Belgium
Some restrictions apply. There is now a time limit of 6 months after arrival in Belgium. The relevant expenses need to be demonstrated with supporting documents, which means that any lump-sum repayments would be excluded. The maximum amount of furnishing costs is limited to €1,500, which seems extremely low as well.
- Schooling expenses incurred in Belgium
These are schooling fees for the children of the household and of the taxpayer’s partner, but only to the extent they are subject to Belgian compulsory education and attend a private or international school in Belgium. The previously offered possibility to also reimburse certain foreign schooling expenses is no longer applicable.
- Costs of hiring a tax advisor or consultant
The cost of applying for the expat tax regime and any related advice in this matter can also be considered a cost proper to the employer, which is eligible for a tax-free reimbursement to the employee. However, the cost for filing the annual tax return is a private expense.
As a summary, we believe that putting together a complete salary package that consists of taxable salary and benefits, on one hand, and a tax-free reimbursement of expenses, on the other hand, can result in a rather complex exercise. Not only in view of preparing the initial application for the special expat tax status, but also for regularly checking afterwards that one continues to meet the conditions throughout the Belgian employment.
Payroll accounting is a dynamic process as different changes may occur throughout the year, especially in an international context. Employee remuneration is not a fixed concept and various changes in the form of performance related bonusses, incentive schemes like stock options or RSUs, changes in company car or other benefits in kind, etc. may need to be implemented.
A close collaboration with your tax advisor and payroll provider is therefore essential when applying for the special tax regime.