Municipal tax for non-residents: will the fixed 7% come to an end?
For Belgian residents, municipal surcharges are levied as a surcharge on personal income tax. The applicable rate is determined by the municipality where the taxpayer is domiciled on 1 January of the assessment year. That rate differs from municipality to municipality.
This is different for non-residents. For example, if you live in the Netherlands but receive taxable professional income in Belgium, you do not have a tax domicile to which a municipal rate can be linked. That is why a flat-rate increase of 7% is currently applied in the tax on non-residents.
However, that scheme has been under pressure in the past period. The Court of Justice of the European Union ruled that the Belgian scheme may be contrary to the free movement of workers if that fixed 7% results in a non-resident being taxed more heavily than a comparable Belgian resident.
The Belgian government is now following up on that ruling. The Council of Ministers has now approved a preliminary draft that would give non-residents the opportunity to demonstrate that they must be located in a Belgian municipality where a rate of less than 7% applies for the purposes of the municipal tax.
Why is the flat rate of 7% under fire?
The flat-rate increase for non-residents was introduced on the basis of the principle that non-residents also contribute to the financing of Belgian public services and facilities. Although they do not reside in Belgium, they also use, i.a. infrastructure and other public services as a result of their economic activity.
Since a non-resident is not a Belgian tax resident, the rate of their place of residence cannot simply be applied. The legislator therefore opted for a flat rate of 7%.
It was precisely this flat-rate approach that was the subject of proceedings before the Court of Justice. After all, some Belgian municipalities apply a municipal tax that is lower than 7%. In certain cases, a non-resident may therefore be taxed more heavily than someone who lives in Belgium, but is otherwise in a similar situation.
The Court recognised that striving for an equal contribution from residents and non-residents can in itself be a legitimate objective. However, according to the Court, a fixed increase of 7% goes beyond what is necessary if in practice it leads to a higher tax burden for the non-resident. In that case, the legislation may constitute an unlawful restriction on the free movement of workers.
Belgian government comes up with an answer
When we discussed this issue earlier, it was not yet clear how the Belgian legislator or tax authorities would respond to this European case law. That now seems to be changing.
The Council of Ministers approved a preliminary draft that would allow non-residents to demonstrate that they can be located in a Belgian municipality that applies a municipal tax of less than 7%. According to the explanatory memorandum to the proposal, the aim is to be able to take into account situations in which a lower municipal rate would apply.
If the proposal is adopted, this potentially seems to be able to lead to a correction of the difference between the 7% applied at a flat rate and the rate of the municipality in which the taxpayer can be located.
The flat-rate 7% would therefore not necessarily disappear completely. However, there would be a possibility to deviate from that rate if the non-resident can demonstrate that a lower municipal rate is relevant to their situation.
This discussion is also relevant to the past. Non-residents who paid the fixed 7% may be able to request a partial refund for previous assessments on the basis of European case law. Of course, the applicable conditions and time limits must be taken into account.
How big of an impact will it have in practice?
The question is, of course, how many non-residents will be able to make use of the new scheme in practice. After all, less than 20% of Belgian municipalities currently apply a municipal tax of less than 7%.
For non-residents who are linked to a municipality with a rate of 7% or more, the proposed change therefore seems at first sight to make little or no difference. On the other hand, for those who can be located in a municipality with a lower rate, the financial impact may be relevant.
Crucial question: where is a non-resident located?
It is precisely there that an important question remains unanswered for the time being. After all, the taxation of non-residents covers very different situations. Think of employees who are temporarily staying in Belgium, but also of cross-border workers who live in the Netherlands, France, Germany or Luxembourg and commute to a Belgian workplace every day.
Which Belgian municipality should serve as a point of reference in these cases? Is the place of work, the place of establishment of the employer, the place where the professional activity is mainly carried out or other factors taken into account?
It is also not yet clear which supporting documents a non-resident will have to submit to prove a certain location and how the procedure will work in practice.
The preliminary draft is therefore an important follow-up to the European case law on the Belgian municipal tax for non-residents. The government is taking a first step to respond to the criticism of the 7% flat rate, but its concrete scope will depend on the final legislation and, above all, on the rules that will link non-residents to a Belgian municipality.
We are therefore closely following the further elaboration.