New reporting, withholding obligations pending for remuneration granted by foreign parent company
The Belgian government has prepared legislation regarding the introduction of an income tax reporting obligation and a tax withholding obligation for all Belgian employers with respect to remuneration paid or granted by a foreign parent company or affiliate. The reporting obligation would apply for income year 2018. The tax withholding obligation would follow as from income year 2019.
To date, there has been no reporting or tax withholding obligation for elements of remuneration provided by a foreign parent or affiliate if there was no involvement of the Belgian subsidiary/employer. Only one exception was made with respect to the reporting of stock options accepted within 60 days according to the Stock Option Law of 26 March 1999. Even though there was no obligation for the employer, the employee has always been obliged to report the income in his/her personal income tax return.
Once approved, the legislation will introduce two new obligations that will enter into force at different times. A new reporting obligation with respect to remuneration paid by a foreign parent company or affiliate – applicable regardless of whether or not the Belgian employer has been involved – is introduced for income paid as of 1 January 2018. This income must be included in the salary reporting to be done by the end of February 2019. As of 1 January 2019, there will also be a withholding tax obligation for such remuneration.
Implications of new rules
Communication with headquarters and affiliates
In order to comply with both new obligations, the foreign headquarters and/or affiliates will need to inform the Belgian subsidiary about all remuneration granted to an employee working in Belgium. The obligation to report this income on the applicable Belgian salary statement will only occur once a year. The tax withholding obligation, however, is a monthly obligation with strict deadlines. As the reporting and withholding obligations are on the Belgian employer, accurate communication between the Belgian subsidiary and the foreign parent company and/or affiliates will therefore become crucial to facilitate timely filing of the monthly return and to avoid penalties.
Roll-Over reimbursement technique
The new rules will also have an impact on a frequently-used tax reimbursement technique for assignees on a tax-equalization package in Belgium, called the “rollover method.” When applying this method, the home country employer pays remuneration in the current year without having to deduct wage withholding tax; income tax will then only be due after the assignee has filed a tax return and received a tax assessment, which is typically 12 to 18 months later. These payments will also fall under the scope of the new rules and therefore will have to be reported and withholding taxes remitted. Employers using this technique will need to explore alternatives.
Social security and elements of remuneration paid by foreign parent company or affiliate
Note that the Belgian social security authorities have modified their interpretation with respect to the qualification of salary subject to Belgian social security. According to the new administrative instructions, all benefits that relate to the work performed by the employee in the execution of his/her employment contract with the employer are subject to social security contributions. Thus, the new interpretation requires that equity-based compensation that is granted by a foreign parent company without recharge to the Belgian subsidiary be included. This change in interpretation should be considered in conjunction with the above income tax changes.
The draft bill allows penalties to be assessed in cases where the new obligations are not complied with. A fine of 10 percent of the accrued or paid remuneration to the Belgian employee will be imposed in case of non-compliance. The fine will not be imposed, however, in case the employer can prove that the remuneration has been included in the income tax return of the employee. The taxation of the remuneration is in that case already assured.
What should groups do?
Groups that have a centrally managed equity-based compensation plan will have to review the implementation of these plans in Belgium as a result of the new obligations. Also, global mobility practices may have to be reviewed as income paid through the home country payroll becomes subject to reporting and withholding.