Municipal Taxation Without Borders: Belgium and Cross-Border Income

This article was originally published in the professional journal Grensoverschrijdend Werken.

If you live or work in Belgium, you may be subject to Belgian municipal taxation. This Belgian tax has recently once again become the subject of debate. Belgian residents with employment income taxable in the Netherlands remain subject in Belgium to an additional municipal tax in respect of that Dutch income. This Belgian legislation was recently challenged before a Dutch court by a Belgian taxpayer seeking to avoid this additional municipal levy.

In addition, the Court of Justice of the European Union has delivered a judgment concerning the application of municipal taxation in the reverse situation, namely for non-residents of Belgium receiving Belgian taxable income. In this ruling, the Court raised critical concerns regarding the compatibility of the Belgian tax regime with the European Union principle of the free movement of workers. For Dutch residents earning Belgian employment income, this case law may provide grounds for a partial reimbursement of municipal tax already paid.

Below, we summarise the applicable tax principles in both directions of cross-border employment and examine the implications of the recent case law in greater detail.

At a Glance

• Belgian residents with Dutch employment income remain subject to Belgian additional municipal tax; recent case law confirms the validity of this regime.
• Non-residents with Belgian employment income from a Belgian employer may, following recent European case law, be entitled to reclaim municipal tax that may have been overpaid, depending on their individual circumstances and the position adopted by the Belgian tax authorities.

Belgian Residents with Dutch Employment Income

Historically, the employment income of cross-border workers was taxable exclusively in their state of residence. Consequently, a Belgian resident working in the Netherlands paid Belgian personal income tax on that Dutch income. In addition to personal income tax, municipal tax was also payable, generating substantial revenue for Belgian border municipalities with large numbers of cross-border workers.

This changed in 2001 with the introduction of the new Belgium-Netherlands Double Tax Treaty. Under the treaty, employment income of cross-border workers became taxable solely in the state of employment. As a result, Belgian residents working in the Netherlands are no longer liable to Belgian personal income tax on that income. For Belgian border municipalities, however, this resulted in a significant loss of revenue.

To compensate for this loss, a special provision was included in the protocol to the treaty. Under that provision, Belgium may continue to levy additional municipal tax on income that is exempt from Belgian personal income tax. Belgian tax residents must therefore declare their foreign employment income in their Belgian personal income tax return and claim the applicable exemption. However, this exemption does not extend to municipal tax, which may still be levied on Dutch employment income.

Although this regime has frequently been criticised on the grounds of alleged double taxation and discrimination, the Belgian Constitutional Court ruled in its judgment of 5 February 2009 that the municipal tax does not infringe the free movement of workers, does not constitute double taxation, and is not discriminatory.

Subsequent case law has consistently followed the same approach. Whenever the issue concerns additional municipal taxation, the courts have repeatedly confirmed that:

“Belgium retains the right to calculate municipal taxation on employment income exempt under the exemption with progression method.”

More recently, Belgian taxpayers attempted to challenge the Belgian municipal tax before a Dutch court. The Court of Appeal of ‘s-Hertogenbosch held, unsurprisingly, that the Dutch courts have no jurisdiction to rule on a Belgian municipal levy imposed on income taxed in the Netherlands. Any challenge to the tax must therefore be brought before the Belgian courts.

Accordingly, the conclusion remains unchanged in all cases: the Belgian municipal tax on employment income taxable in the Netherlands continues to withstand legal scrutiny.

For Belgian residents receiving Dutch employment income, it remains essential that such income is correctly declared in the Belgian personal income tax return. This ensures the correct calculation of municipal tax and allows any tax paid in the Netherlands to be appropriately taken into account.

Non-Residents with Belgian Taxable Income

Municipal tax is a local levy imposed by Belgian municipalities to finance their operations. Each municipality has the authority to determine its own rate. Belgian residents are subject to the rate applicable in the municipality where they maintain their tax residence. As a result, municipal tax rates can vary significantly depending on the taxpayer’s official place of residence.

Although non-residents do not have their official residence in Belgium, they may nevertheless be subject to an additional municipal tax. For example, where an individual lives in the Netherlands but works in Belgium for a Belgian employer, a fixed rate of 7% generally applies. In certain circumstances, this fixed levy can result in a higher tax burden than that borne by Belgian residents, as many Belgian municipalities apply rates below 7%. One notable example is the municipality of Knokke-Heist, where the municipal tax rate is 0%.

This regime was referred to the Court of Justice of the European Union because of concerns regarding its compatibility with the free movement of workers. The Belgian State argued that the legislation was intended to ensure equal treatment between residents and non-residents. The legislature wished to avoid a situation in which Belgian tax residents, who are required to pay municipal tax, would be treated less favourably than non-residents. In this regard, it sought to ensure that non-residents also contribute proportionately to the financing of public services and functions. After all, non-residents likewise benefit from Belgian infrastructure, public safety, healthcare services and cultural facilities.

The Court of Justice acknowledged that equal treatment may constitute a legitimate objective. However, it found that the current regime can, in certain situations, impose a heavier tax burden on non-residents than on Belgian residents. In such cases, the levy is not appropriate for achieving its stated objective and goes beyond what is necessary. The argument that the measure prevents reverse discrimination against residents is insufficient to justify restrictions on the free movement of workers.

The Court therefore concluded that the principle of free movement of workers precludes the application of a fixed municipal tax for non-residents where that tax results in a higher burden than that imposed on Belgian tax residents.

Important: For Dutch residents receiving Belgian employment income who have been subject to the fixed 7% municipal tax, the recent judgment of the Court of Justice may provide grounds for a partial refund of that levy. However, the precise implications of the ruling remain uncertain, as an official position from the Belgian tax authorities is still awaited.

In principle, it may be possible to request a correction of tax assessments issued within the past five years on the basis of this judgment. Nevertheless, we currently recommend refraining from taking action until the Belgian tax authorities have clarified their position. This avoids the risk of a correction request being rejected, thereby necessitating legal proceedings to secure a refund.

Should the Belgian tax authorities fail to issue guidance before the end of the year, it would be prudent to submit a request for ex officio relief. This ensures that the statutory filing deadline for a particular tax year does not expire while awaiting further clarification.