Art. 18-22

Question 1

What is article 18?

Answer 1

• Rule: only taxable in State of Residence of the recipient
• Justification:
  
  • Residence State can tax on basis of net income – gross withholding tax may far exceed the appropriate tax
  • Residence State has burden of caring for ageing population
  • Source State may have foregone significant tax while worker was earning the income
  • Source State taxation difficult to administer – contributions may not relate to services performed in particular country (argument in favor of Residence state tax)
• Problem: taxing rights in residence state:
  
  • 40y claiming tax advantage for premiums: eg. Belgium: reduction = % of premiums –> mismatch when they move.
• Professor: former work state should retain taxing rights: cohestion rule/matching principle: OECD disagrees

Question 2

What is the discrepancy with pensions?

Answer 2

• Discrepancy/tension between (i) deductibility of (extralegal) pension contributions (State of employment) (ii) power to tax pension income (State of residence) → more and more deviations from Art. 18 OECD MC in bilateral treaties (Also to prevent abuse; see e.g. B/NL tax treaty)
  
  • EET vs. TEE regimes

Question 3

What are “pensions and other similar remuneration”?

Answer 3

• Remuneration “in consideration of past employment” in private sector
  
  • Not public sector (Att.19 (2), nor independent services (Art. 21)
• In periodic form (annuities) but also lump-sum (capital) payment in lieu of pension (OECD MC Comm Art. 18 §5)
• Irrelevant whether paid to former employee or surviving spouse, children etc. (OECD MC Comm Art. 18 §5)
• Out of schemes in 1st, 2nd or 3rd pillar: in principle all 3 covered but Belgian treaties deviate: only 1st pillar pensions: taxing rights retained by source state
  
  • 1st pillar: statutory soc. sec. schemes: mandatory under State’s SocSec-law offering minimum social protection to population, incl. pension
  • 2nd: occupational pension schemes: set up by employer to benefit of employees (extra-legal pension schemes)
  • 3rd: individual retirement schemes: individually and voluntary

Question 4

What is art. 19?

Answer 4

• “Salaries, wages and other remuneration”: same as Art. 15
• “In respect of services rendered to CS, political subdivision, local authority thereof”: public sector (civil servants)
• “Paid by a Contracting State”: payor must be formally the State, political subdivision, local authority
  
  • Not if State is paying agent of private employer
  • Payment with public funds is not sufficient. Salary paid by public law company (eg State railway, telecom operator) does not come under Art. 19 (but Art. 15, see Art. 19 3))
  • EU officers ≠ Art. 19 (special protocol)
• Exception: taxing rights for work State (W) if salary is paid for services performed in W provided that
  • The recipient is resident AND national of W
  • Or did not become a resident of W solely for purposes of rendering the services (“recruitment of W resident”)

Question 5

What is art. 19(2)?

Answer 5

• “any pensions and other similar remuneration”: periodic payments and capital payments in lieu of pension (OECD MC Comm Art. 19 §5.1, see Art. 18)
• “in respect of services to a CS, political subdivision or local authority thereof”: past employment in public sector
• “out of funds created by a CS, political subdivision or local authority thereof”: covers indirect payments (OECD MC Comm Art. 19 §5.2)
  
  • Mobility public/private sector: portability of pension rights
    
    • Public > private and pension transferred to private scheme: on pay out Art. 19 technically does not apply. Art. 18 controlling
    • Private > public: diverging views between countries: (1) Art. 19 applies to entire pension, (2) apportionment (OECD MC Comm Art. 19 §5.3 et seq)
• Exception: taxable in State of residence of recipient if he has nationality of that State (Art. 19 (2) (b)

Question 6

What is art. 19(3)?

Answer 6

• Business carried on by CS
  
  • Public railways, post, telecom, waste water treatment etc. by national or local authorities
  • Art. 19 is set aside and Art. 15 – 19 become applicable again
• Eg. Proximus: limited liability company: majority of shares are held by states
  
  • People are carved out of art. 19 because not considered true civil servants = only public, non-commercial activities
  • Why? Level playing field

Question 7

What is art. 20?

Answer 7

• Student or business apprentice
• Is or was immediately before visiting a CS (“State of Study”) a resident of other CS
• Temporary presence in State of Study solely for purposes of education or training
• Payments received for the purposes of maintenance, education or training
• Payments arising from sources outside State of Study
• Why? May earn some income and some scholarships are taxed by certain countries
• State of Study may not tax payment arising abroad
  
  • Fostering international exchange of students and knowledge

Question 8

What is article 21?

Answer 8

• All other categories of income not dealt with in the treaty are taxable only in the State of residence (Art. 21 (1) OECD MC)
• Exception: if the income is connected with a PE, it is taxed in the State where the PE is located (Art. 21 (2) OECD MC
  
  • But not for income from immovable property
• 2 possibilities:
  
  • Income outside any of the definitions of the various categories in the treaty
    • Eg. alimony; income from life insurance; pensions paid to former independent service providers; lottery prizes; indemnity paid upon termination of contract that is not salary under Art. 15 etc.
  • Income sourced in a third State (“wherever arising”)

Question 9

What is the scope of art. 22?

Answer 9

• Scope: only taxes on capital (i.e. wealth tax (“vermogensbelasting”/”impôt sur la fortune”/Vermögenssteuer”)
  
  • not: taxes on estates and inheritances, on gifts
• Generally: complementary taxation of income from capital
  
  • OECD MC opts to follow same rules as for income derived from capital investments
• Immovable property: State where property is located
• Movable property forming part of a PE: State where PE is located
• Ships and aircraft: State of place of effective management
• All other elements: State of residence
  
  • The new Belgian tax on effectenrekeningen (TER) is a wealth tax. If securities account with B bank is held by a non resident B has no taxing rights