Update – Case law on exemption method for foreign employment income incompatible with EU Law

Written by Nicolas de Limbourg 23 October 2015


As mentioned in our headline of 15 July 2014, the Belgian tax authorities published a practice note (updating their position on to the attribution of personal tax benefits) after Belgium was sentenced by the European Court of Justice for breaching EU law. The relevant judgement indicated that EU law is violated where a taxpayer cannot effectively benefit from personal tax benefits linked to his family status (e.g. increase in tax free amount for dependent children) due to the fact that he or she is (partially) exempted from Belgian taxation on income linked to activities performed in another member state of the European Economic Area (EEA).

According to the Belgian tax authorities, this European case law can only be invoked by taxpayers who have a joint tax filing obligation (i.e. couples who are married or legally cohabiting) and for whom the partner earning the highest income is (partially) exempt from Belgian income taxes due to the fact that he or she is employed in another EEA member state.

The Belgian tax authorities will allocate the tax benefits to the other partner (who is taxable in Belgium but has the lower amount of income) if it can be proven that the other member state did not grant any benefit linked to the personal situation of the taxpayer. Consequently, if another state grants a pro rata of the personal tax benefits linked to the family status, the Belgian tax authorities will not allocate the benefits to the other partner.

Moreover, according to the Belgian tax authorities, if a taxpayer (who is married or legally cohabiting) receives income that is taxable in the Netherlands, the tax reduction in relation to Belgian personal tax benefits linked to the family status will not be allocated to the other partner. This is due to the fact that a non-discrimination clause is laid down in the double tax treaty concluded between the Netherlands and Belgium stating that the source state (i.e. the Netherlands) should attribute personal tax benefits linked to the family status also to non-residents relative to the income received in this source state. This exclusion is applied by the Belgian tax authorities regardless of whether the taxpayer can effectively benefit from any personal tax benefits linked to his family status in the Netherlands.

Judgement of the Court of Appeal of Antwerp

In this respect, a married couple, tax residents of Belgium, won their case against the Belgian tax authorities. One of the spouses was employed in the Netherlands. Consequently, the income resulting from this employment activity (commonly referred to as “earned income” or “professional income” was taxable in the Netherlands. As a result of the above position of the Belgian tax authorities, the couple was not allowed to benefit from the personal tax benefits for dependent children in Belgium. Moreover, they were also excluded from tax benefits in relation to their dependent children in the Netherlands.

The Court of Appeal in Antwerp was of the opinion that married taxpayers of whom one of the spouses receives employment income that is taxable in the Netherlands are discriminated compared to a situation of unmarried taxpayers (who can freely choose to allocate the tax benefits to the partner who is only employed in Belgium) or to a situation where both married taxpayers are employed in Belgium (in which case the tax benefits would be attributed to the partner with the highest income). The Court of Appeal decided that the married couple is fully entitled to the personal tax benefits for dependent children. The court thus ignored the Belgian tax authorities’ practice note and position that initially gave rise to the discriminatory situation.