Brussels, Saterday 20 May 2007


The danger of a tax equalization policy

I draw the attention of the American employers who transfer in Belgium their executives in the context of a tax equalization policy (or net take home pay) that they would be advised to stipulate in their assignment letter that the commitment entered into by them to refund the Belgian taxes contains a reserve in the case where the executive decides, only, to remain in Belgium and to become a Belgian tax resident. In the context of a tax equalization policy the executive is entitled to receive a refunding of the Belgian taxes he has to pay, such a refund will be taxed again triggering a new assessment of Belgian taxes which will  be paid by the executive and refunded by the company : that's the so-called "snowball effect ". In case the executive become a Belgian tax resident the question arises to know if the employer must also refund the Belgian taxes on the initial refunding of taxes and so on, which it must do in the context of a literal interpretation of a tax equalization policy ?.

It’s my opinion that the question is debatable since the choice to become Belgian resident was uniquely made by the executive without the agreement of the company. If the executive had gone back to the USA the refunding of Belgian taxes after the departure of Belgium might not have been subjected to the Belgian taxes (see the judgments of February 16, 2004, and June 25, 2005 of the Court of 1st Instance of Namur). However these cases law are now debatable since the Court of appeal of Liège has taken in its 28 June 2006 arrest a contrary opinion following which the tax equalization refund paid by a foreign US employer was taxable in Belgium even when the executive has left Belgium well before the refund (When I was a young tax adviser amongst some of the so-called big eight, this mid of the eighties the following scheme was supported by (certainly) one of these firms: the company in the US was making a loan to the expatriate to pay his Belgian taxes. When back in the US the loan was cancelled and treated as US source taxable income. Well it was the eighties).

In anycase and in order to avoid discussions, always delicate, the letter of transfer should stipulate that: “In the event of the decision, taken only, of the executive to become a Belgian tax resident, thus losing his tax statute of expatriate, the company will refund him the Belgian taxes which he has to pay for his period of expatriation and in no way the Belgian taxes on such refunds when the executive becomes a Belgian tax resident ".
More widely the assignment letter should also foresee what will occur in the event an expatriate is made redundant or leaves the company to stay, no matter in which quality, in Belgium.


Stephen G Hürner