Because of the travel restrictions triggered by the COVID-19 pandemic, cross-border employees unexpectedly working from home face the risk that their employment income becomes fully taxable in their State of residence. Last year, to alleviate this tax disadvantage, Belgium concluded “COVID-19 Mutual Agreements” with France, Germany, Luxembourg and the Netherlands. This year, although the vaccination campaign is up and running and the end of the pandemic appears to be in sight, remote working remains the rule. In light of this reality, the Belgian government has announced the extension of the COVID-19 Mutual Agreements through 31 December 2021.
Background & Problem – General Tax Rules for International Employment
Under Belgium’s Bilateral Tax Treaties (“BTTs”) and the OECD Model Tax Convention, a cross-border worker’s compensation is, in principle, taxable in the work state (i.e., the state where the worker actually and physically performs his work). However, in specific circumstances - one such circumstance being when the cross-border worker does not spend more than 183 days during a calendar year (or any other 12-month period) in the work state - the state of residence retains the right to tax cross-border workers’ compensation.
Here is an example to illustrate. A Belgian tax resident works for a Benelux company and spends 70 percent of his working hours in Amsterdam (the Netherlands). Under the standard rules, 70 percent of his salary will be taxable in the Netherlands (i.e., the work state). However, if due to COVID-19 restrictions, this Belgian tax resident is forced to work from his home in Brussels (Belgium) and consequently no longer meets the 183 days threshold, that 70 percent of his income will be taxed in his state of residence (Belgium).
This creates burdensome tax implications, both for employees - who will need to pay more tax in Belgium - and employers - who are required to withhold larger amounts of wage withholding tax and perhaps even to pay higher salaries. The administrative and financial upshot is considerable as well.
Solution – COVID-19 Mutual Agreements between Belgium & Neighbouring Countries
This is where the “COVID-19 Mutual Agreements” kick in. Under these agreements, days worked from home are fictitiously assimilated with days worked in the country where the individual would normally have worked. Put otherwise, the employment income remains taxable in the work state despite remote working in the State of residence.
If we come back to the example of our Belgian tax resident, he will – thanks to the COVID-19 Mutual Agreements –be deemed to have worked in his habitual place of work, where he would have physically performed his employment activities in a “normal” non-COVID-19 situation (i.e., in the Netherlands, his work state). Thus, there will be no negative impact on his tax position in either Belgium or the Netherlands.
The following should be noted regarding the COVID-19 Mutual Agreements:
- They have been concluded only between Belgium and the Netherlands, France, Germany and Luxembourg. For any other country, Belgium will continue to apply the standard rules and be entitled to tax the employment income relating to the days worked from home, despite the COVID-19 travel restrictions;
- They only apply from 11 March 2020 through 31 December 2021 (unless Belgium and the neighbouring countries agree to a further extension). After that date, the standard rules under the DTTs take effect again;
- They do not apply to self-employed workers, including company directors;
- They do not apply to employees with the “foreign executive” or expat status;
- They do not apply to secondments (i.e., employees who are temporarily seconded to work in another state);
- They do not apply to homeworking days not linked to governmental measures (e.g., for employees who – under their employment contract – usually work from home).
For further details, please note that the Belgian Revenue Service has published Circular Letter 2020/C/81 dated 17 June 2020 (available here in French, and here in Dutch) providing answers to Frequently Asked Questions (FAQ). It explains, among other things, that cross-border employees are required to keep sufficient evidence of their eligibility through (i) a written certificate from their employers about the days worked from home because of the COVID-19 restrictions, and (ii) a document showing an effective taxation of their employment income in the State of source. The former must include specific information listed in the Circular Letter. Taxpayers questions not covered by the Circular Letter are invited to send an email to email@example.com.