The new income tax treaty signed by Belgium and the Netherlands is expected to enter into force on January 1, 2025, approximately one year from now (subject to approval by the legislative bodies of both countries), making this the perfect time for a short overview.
Whilst the new treaty introduces changes that will affect corporations, a number of adjustments will have an impact on directors, employees, and individuals.
The most important change for company directors is that under the new treaty any remuneration paid for attending board of directors meetings will be taxable in the country where the company is established. All other remuneration – for example, remuneration received for the day-to-day management of the company -- will be taxed in accordance with the rules that apply to employees.
Under the current treaty, the taxation of director fees is more complex, and differs depending on whether the director operates under an employment contract or not.
In view of this upcoming change, directors are advised to review the current agreements in place and document which part of the agreement relates to board meetings and which part relates to other activities.
Another important change, for both directors and employees, is that stock options will no longer be included in the so-called compensation allowance when the taxable moment in both countries is not the same. As a reminder: Belgium usually taxes stock options at the time of grant, while the Netherlands usually taxes at the time of exercise of the stock options.
The compensation allowance is a correction mechanism that provides for financial compensation to Dutch residents if their employment in Belgium results in a higher tax burden than in a (hypothetical) situation whereby they are solely taxable In the Netherlands. From the moment of entry into force of the new treaty, stock options taxed in Belgium at the moment of grant will be excluded from the basis on which the compensation allowance calculation will be based.
First, observers anticipated that the complex pension article in the current treaty would be modified, but in the end the pension article remained unchanged.
Second, the article on employment income has not changed. For a while now, the two countries have been negotiating to find an appropriate solution for the taxation of cross-border teleworkers, the number of which has significantly increased since the end of the Covid pandemic.
The Administrative Commission for the Coordination of Social Security Systems in Europe introduced a Framework Agreement, signed by most but not all EU countries, that allows employees, under certain conditions, to remain subject to the social security scheme of the country where they usually work, even when they telework from their home country. For prior coverage, see “Belgium - EU Framework Agreement on Cross-border telework enters into force - BDO.”
No such exception exists in the tax rules, so that employees who telework in a country other than their normal place of activity will always be confronted with the prospect of split taxation, which leads to additional complexity and also has financial consequences. On the table is the introduction of a de minimis rule allowing employees to work from home for a certain number of days while continuing to be fully taxable in the other country. For example, Belgium and Luxembourg already have such an agreement in place.
Discussions are still ongoing, but in order not to jeopardise the timing of the ratification and application of the new treaty, negotiators decided not to amend the article on employment income and to include those rules in a separate agreement once a compromise has been reached.
In general terms, the agreement states that telework activities in the employee’s home country will not in itself result in a permanent establishment if those activities cover less than 50% of the total employment time in a rolling period of 12 months. Special attention should be paid to dependent agents/employees whose activities cannot be considered to be of a preparatory or auxiliary nature, because they may still create a permanent establishment.
To prepare for the upcoming changes and assess the implications of the new treaty for your organisation, please reach out to your regular BDO contact in Belgium or the Netherlands.
Peter Wuyts
BDO Belgium
Whilst the new treaty introduces changes that will affect corporations, a number of adjustments will have an impact on directors, employees, and individuals.
The most important change for company directors is that under the new treaty any remuneration paid for attending board of directors meetings will be taxable in the country where the company is established. All other remuneration – for example, remuneration received for the day-to-day management of the company -- will be taxed in accordance with the rules that apply to employees.
Under the current treaty, the taxation of director fees is more complex, and differs depending on whether the director operates under an employment contract or not.
In view of this upcoming change, directors are advised to review the current agreements in place and document which part of the agreement relates to board meetings and which part relates to other activities.
Another important change, for both directors and employees, is that stock options will no longer be included in the so-called compensation allowance when the taxable moment in both countries is not the same. As a reminder: Belgium usually taxes stock options at the time of grant, while the Netherlands usually taxes at the time of exercise of the stock options.
The compensation allowance is a correction mechanism that provides for financial compensation to Dutch residents if their employment in Belgium results in a higher tax burden than in a (hypothetical) situation whereby they are solely taxable In the Netherlands. From the moment of entry into force of the new treaty, stock options taxed in Belgium at the moment of grant will be excluded from the basis on which the compensation allowance calculation will be based.
Changes not coming
Two expected changes were not included in the new treaty.First, observers anticipated that the complex pension article in the current treaty would be modified, but in the end the pension article remained unchanged.
Second, the article on employment income has not changed. For a while now, the two countries have been negotiating to find an appropriate solution for the taxation of cross-border teleworkers, the number of which has significantly increased since the end of the Covid pandemic.
The Administrative Commission for the Coordination of Social Security Systems in Europe introduced a Framework Agreement, signed by most but not all EU countries, that allows employees, under certain conditions, to remain subject to the social security scheme of the country where they usually work, even when they telework from their home country. For prior coverage, see “Belgium - EU Framework Agreement on Cross-border telework enters into force - BDO.”
No such exception exists in the tax rules, so that employees who telework in a country other than their normal place of activity will always be confronted with the prospect of split taxation, which leads to additional complexity and also has financial consequences. On the table is the introduction of a de minimis rule allowing employees to work from home for a certain number of days while continuing to be fully taxable in the other country. For example, Belgium and Luxembourg already have such an agreement in place.
Discussions are still ongoing, but in order not to jeopardise the timing of the ratification and application of the new treaty, negotiators decided not to amend the article on employment income and to include those rules in a separate agreement once a compromise has been reached.
Permanent establishments
One other additional agreement has been reached recently. On 23 November, both countries signed off on an agreement on the interpretation of the permanent establishment article in the treaty. The purpose of this agreement is to provide clarity to employers in Belgium and the Netherlands on the elements that are relevant in assessing whether telework situations in the employee’s home country will result in a permanent establishment under article 5 of the treaty.In general terms, the agreement states that telework activities in the employee’s home country will not in itself result in a permanent establishment if those activities cover less than 50% of the total employment time in a rolling period of 12 months. Special attention should be paid to dependent agents/employees whose activities cannot be considered to be of a preparatory or auxiliary nature, because they may still create a permanent establishment.
To prepare for the upcoming changes and assess the implications of the new treaty for your organisation, please reach out to your regular BDO contact in Belgium or the Netherlands.
Peter Wuyts
BDO Belgium