Working from home - Impact on employees and company directors benefitting from the special tax regime for foreign executives and specialists
The corona crisis has impacted our lives in a major way. Not only did we have to adjust our personal and social behavior, it is clear that our professional lives also significantly changed, as organizations and their employees were obliged to re-organize their way of working in the blink of an eye. Furthermore, we can reasonably think that working from home will become common as this “new normal” will probably allow employees to work remotely more frequently. The home office treatment will have an important impact on employees working in a cross-border situation as well as on the companies they work for. In this respect, a specific focus needs to be given on employees and company directors benefitting from the Belgian special tax status for foreign executives and specialists.
As you may know, one of the main benefits of this special tax regime consists of the so-called “foreign travel exclusion”. Under this mechanism, the portion of the salary pertaining to days spent outside of Belgium for professional purposes is deducted from the taxable basis and consequently exempt from taxation in Belgium. Considering the impact of this mechanism on the taxable basis of the foreign executive, it is of the utmost importance to determine his/her travel exclusion percentage accurately in order to evaluate his/her Belgian tax liability. In this respect, in many cases, the Covid-19 travel restrictions have influenced the travel exclusion percentage of these people due to the cancellation or the postponement of their business trips. On the other hand, some of these executives can work from home, which is located outside of Belgium.
How is the travel exclusion percentage calculated?
The foreign travel exclusion percentage, i.e. the breakdown between the compensation earned in Belgium and the salary earned outside of Belgium, is usually obtained by comparing the number of working days spent in Belgium with the total number of working days for the whole year (or a shorter period in case of a part-year activity in Belgium).
Considering the current limitation of international travel, it is clear that it has an impact on the travel exclusion of the foreign executives and consequently on their net salary or their employment cost, depending on their compensation structure.
There were some theoretical arguments to consider the COVID-19 outbreak as “force majeure” and consequently regard some working days spent at home due to a cancellation of a scheduled business trip as a foreign day as or it could have been considered to base the 2020 travel percentage on the previous income year. The Belgian tax authorities however have not allowed any exceptions to the standard travel exclusion rules and communicated a restrictive interpretation.
Based on the prescribed strict interpretation, it is obvious that working from home days spent in Belgium need to be considered as spent in Belgium.
However, for some foreign executives, the home office can be located outside of Belgium. As such, the question was raised whether these home working days outside of Belgium can be considered for the determination of the travel exclusion. From the Belgian tax authorities’ perspective, the answer to this question depends on the individual’s residency situation:
- The individual is a resident of the country where he is working from home from: in that case, the working from home days are considered for the travel exclusion calculation as performed abroad (it also means that the portion of his salary paid for these non-Belgian will be taxable in his country of residence);
- The individual is not a resident of the country where he is working from home from: in this case, the home working days cannot be considered as foreign business days since the Belgian tax authorities claim that the presence abroad is not connected with a mission outside of Belgium but rather results from a personal choice. As such, the foreign business days will be taxable in Belgium, even though they were not physically performed in Belgium.
Given the new position of the Belgian tax authorities, BDO recommends companies monitor the working locations of their foreign executives accurately and check whether or not they are still considered as tax residents of their home country. Based on this analysis, it might be appropriate to revise the Belgian withholding taxes applied on their compensation as working from home will necessarily have an impact on their final Belgian tax liability.
Should you have any questions on this subject, please do not hesitate to reach out to us.