Belgium: Deduction of hypotax for residents

In a recent circular letter, Belgium’s tax authorities have clarified their position regarding the question of the hypothetical (“hypo”) tax and tax equalization arrangements on Belgian income tax returns.

Employees seconded abroad are often paid on a tax equalized basis which implies that a hypothetical tax (“hypotax”) is withheld in order to reach the level of tax the employees would have paid if they were fully taxable in Belgium. Tax equalization also implies that the spendable income of the assignee is not (positively or negatively) influenced by the difference in taxation between the home and host countries.

The tax treatment of the hypo tax has been a point of discussion with the Belgian tax authorities. Currently there are opinions claiming that the professional income can be reduced with the “hypotax” withheld because the employee cannot dispose of the income. While many local tax offices did accept this approach, other tax offices have refused the deduction.

In the circular letter published in September, Belgian tax authorities do now confirm that hypo taxes are deductible from taxable income in the year of payment/withholding. Hypotax therefore should be fully deducted from the foreign source income and cannot be partially attributed to the Belgian source income.

The foreign income taxes paid by the employer on behalf of the employee in principle are to be considered a taxable benefit-in-kind. Since foreign income taxes paid in a given income year can be deducted to determine the net foreign income, the taxable benefit-in-kind for foreign income taxes paid by the employer can thus be offset against the deduction of the foreign income taxes paid (tax neutral).

In principle, the amount reported as salary should be the amount resulting after deduction of social security contributions and hypotax. In practice, however, the amount reported as salary on salary sheet 281 is usually before the hypotax’s deduction. The reported salary can however be deducted through the tax return. In principle, the amount of foreign tax liability paid by the employer should also be reported on salary sheet 281. However, taking into account that only the net foreign income should be reported, this will not result in an additional amount to be reported.

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