The European Commission decided to take legal action against Belgium, referring the case to the Court of Justice of the European Union due to the country’s alleged non-compliance with the free movement of workers principle in taxing non-resident taxpayers with modest income.
The free movement of workers is a fundamental principle of the EU, allowing the citizens of the bloc to live and work in other member states without facing unjustified restrictions. The Commission believes that Belgium’s taxation policies concerning non-resident taxpayers may be in violation of this principle.
On March 10, 2022, in a legal case involving the European Commission and the Kingdom of Belgium (Case C-60/21), the Court determined that Belgium violated a treaty.
The violation occurred because Belgium did not allow non-resident taxpayers, whose earnings in Belgium were less than 75 per cent of their total worldwide income, to subtract their alimony payments from what they have to pay taxes on.
In essence, the Court found that Belgium’s refusal to permit this deduction was inconsistent with the obligations outlined in the relevant treaty.
The country has not resolved compliance issues despite a 2016 formal notice and the Court’s 2022 judgment and is the only EU Member State with an outstanding matter.
Belgium’s stance puts a penalty on nonresident taxpayers who have exercised their right to freedom of movement of workers because they cannot deduct the payments from their taxable income in both their home state and Belgium, where they work.
Following the 2022 judgment, Belgium has broadened the eligibility criteria for the personal tax deduction, yet the infringement was not entirely eliminated.
The recent legislation sets forth two conditions that seem to limit access to benefits for non-residents with modest incomes.
Firstly, the deduction is not transferrable to subsequent tax years in the taxpayer’s home state. However, if a similar tax relief is unavailable in the other state, it should be considered for the same tax year in Belgium and the other Member State.
Secondly, the amended legislation denies the tax deduction if the taxpayer’s spouse could access a similar benefit in another state in the future.
Including the taxpayer’s spouse in the comparability analysis, however, explicitly contradicts the Court’s judgment in Case C-60/21, which pertains to the discrimination of non-resident taxpayers, not their spouses.
Following a final attempt with a formal notice letter sent in July 2023 to align Belgian legislation with the Court’s judgment, the Commission decided on November 16, 2023, to refer Belgium to the Court for a second time.
Should the Court find Belgium in violation of its judgment, the imposition of financial sanctions becomes a potential outcome.
