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03 October 2018 / news

Payroll, social security and legal basis of the special tax regime - part 3/3

This article highlights some considerations with respect to the payroll, social security and the legal basis of the special tax regime.

Past and current tax reforms and their impact

Payroll

When an expatriate benefits from the special tax regime, Belgian tax authorities allow to withhold payroll taxes that are equal to the expatriate’s estimated final (Belgian) income tax burden. In other words, the benefits connected to the application of the special tax regime are already included in the expatriate’s payroll, i.e. the tax free allowances (up to a ceiling of 11.250 EUR or 29.750 EUR per year) and the expatriate’s travel exclusion. This is obviously a deviation from normal payroll tax regulations which results in the withholding (and payment) of lower payroll taxes than those who should have been withheld in normal circumstances. It also implies that the payroll is regularly monitored to keep track of the paid income and travel exclusion in order to ensure withhold payroll taxes keep track with the expatriates estimated final income tax burden and in such way to avoid important tax reimbursements or income taxes to pay upon the receipt of his tax assessment bill. It is important to inform your payroll agent of this approach, otherwise regular payroll taxes will continue to be withheld.

Please note that implementing this payroll tax deviation is at risk of the employer. If the special tax regime would not be approved, Belgian tax authorities could claim from the employer the difference between the withheld (lower) payroll taxes (due in accordance with the special tax regime) and the payroll taxes which should have been withheld in absence of this special tax regime. This would imply that the employer also should claim these overdue payroll taxes back from the expatriate, or, in absence of such claim (because the company bears the cost), apply an additional taxable benefit on behalf of the expatriate equal to the amount of the overdue payroll taxes claimed by the tax authorities. To avoid any risk in this respect, it is possible to wait with the application of  the lower payroll taxes until the request for application of the special tax regime is approved by the tax authorities.

Social security

Insofar Belgian social security would apply on the expatriate’s situation, the special tax regime also reduces employee and employer social security contributions. Indeed, tax-free allowances, school fees, moving costs, home-leave travel etc, can not only be free of taxes, they can also be exempt from social security contributions (with the exception of the tax free allowances, such reimbursements are to be supported on the basis of invoices). Additionally, the amount of tax-free allowances is further increased with an equivalent value of the expatriate’s travel exclusion while applying a cap of 29.750 EUR (per year).

An example illustrates the above: 

Suppose an expatriate with a gross monthly income of 5.000 EUR (single person without people at charge):

 no special tax regime

applying the special tax regime

travel exclusion (0%)

applying the special tax regime

travel exclusion 25%

Gross monthly income 5,000.00 5,000.00 5,000.00
(Less) Tax free allowances 0.00 -937.50 -937.50
(Less) Travel exclusion exempted from Belgian social security 0.00 0.00 -312.12
Subtotal 5,000.00 4,062.50 3,750.00
(Less) Belgian social security (employees) -653.50 -530.97 -490.13
Travel exclusion exempted from Belgian social security 0.00 0.00 312.50
Taxable income 4,346.50 3,531.53 3,572.38
(Less) Payroll taxes -1,595.77 -1,199.23 -754.85
(Less) Special social security contribution -49.51 -39.20 -35.76
Tax free allowances 0.00 937.50 937.50
Net estimated income 2,701.22 3,230.60 3,719.27

Absence of a legal basis

The special tax regime is indeed “special” in many ways, even so because the beneficial treatment is not embedded in the Belgian Income Tax Code. The whole regime is based on a tax letter of August 8, 1983. Obviously, this particular situation is challenged from time to time but managed nonetheless to survive the last 35 years. The reason for its survival ? Because it is an attractive system which is able to compete with neighboring countries having similar tax systems (as The Netherlands, France and Luxembourg).

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