Belgium: Exemptions for foreign source income



The Belgian tax authorities published an administrative circular that clarifies the situations in which Belgium will grant an exemption for foreign-source income (generally all items of income except for income from dividends, interest and royalties) based on tax treaty provisions. The new circular makes a distinction between income taxable in the source state, income taxed in the source state and income effectively taxed in the source state.
Where income is “taxable” in the source state, Belgium must exempt the income from tax without taking into account the actual tax treatment of the income in the treaty partner country. The obligation to grant an exemption applies even if the source state does not use its power to tax.
Belgium must grant an exemption when the income is taxable in the source state and has been subject to the normal tax treatment. This does not mean, however, that the income must have been effectively taxed in the source state. Income is considered to be taxed even when there is no actual taxation because of a deduction for losses or expenses, the income has been specifically classified as non-taxable or exempt in the source state, or the tax is legally due but the source country tax authorities refrain from collecting it.
The circular also lists the circumstances under which foreign-source income should not be considered to have been taxed in the source state and, therefore, Belgium must not grant exemption of the foreign-source income.
Income is effectively taxed in the source state when it has been subject to tax without being classified as non-taxable or tax exempt. Belgium will also have to exempt the foreign-source income when it is taxed in the source country but there is no tax because losses or expenses have been deducted.
The circular specifies that profits of a permanent establishment (PE) must be taken into account as a whole. Thus, if only part of the income has effectively been taxed, all of the profits of the PE must be considered as having been effectively taxed.
The fact that foreign-source income is taxable, taxed or effectively taxed in the source state does not mean that the exemption must be applied automatically. The Belgian tax authorities are instructed to first determine whether the tax authorities of the source state have correctly applied the treaty provisions. If this is the case, the taxpayer has to prove that the foreign-source income has been “taxed” or “effectively taxed”.


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