Cross-border Employment And Foreign Pension Contributions

A recent decision by the Dutch tax authorities, dated 26 May, provides a timely opportunity to reflect on a tax issue in pension accrual that often receives insufficient attention in practice.

Employees engaged in cross-border employment naturally wish to avoid any interruption of their ongoing pension accrual and prefer to keep their pension build-up consolidated under a single framework as much as possible. Failing this, there is a real risk of a loss or reduction of pension entitlements. This issue was already highlighted some ten years ago in a decision of the Ghent Court of Appeal.

For that reason, it is common practice to continue the existing pension commitment during (temporary) employment abroad. While this may seem straightforward, it gives rise to important tax considerations.

In principle, pension contributions paid by the employer or the company constitute taxable income. A tax exemption only applies where the conditions set out in Article 38 of the Belgian Income Tax Code are met.

For Belgian pension commitments, these conditions are generally satisfied. However, this is not necessarily the case for foreign pension schemes.

By way of illustration, an individual pension commitment requires the existence of a collective arrangement that is accessible, on a uniform and non-discriminatory basis, to employees or to a specific category thereof. For company directors, the contributions must relate to remuneration that is granted regularly and at least monthly before the end of the taxable period in which the services were performed, and must be charged to the results of that same period.

In an international context, these conditions are not always met in practice. As a result, foreign pension contributions may be treated as taxable remuneration in Belgium, an issue that is still too often overlooked in cross-border situations and tax filings.

At the stage of pension payment, this may lead to economic double taxation: the pension is taxed abroad, including the portion that was already taxed in Belgium at the contribution stage.

This issue lies at the heart of this Pension Insight. The Netherlands provides a mitigating mechanism through the so-called “balance scheme” (saldoregeling). The Dutch tax authorities have recently confirmed that this mechanism also applies where the effective taxation of the contributions at the time they were paid was significantly lower than the applicable Dutch tax rates.

Finally, this discussion does not yet address the so-called 80% issue, which, under the current legal framework, remains practically unresolved and is therefore not subject to sanctions.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.