Belgian Tax Administration rebuffed: exit “subject-to-tax clause”?

On 25 January 2018, the Court of Cassation reached a remarkable decision in the context of allocation of taxing rights for professional income earned within an international context.

The dispute
In concreto, the case pertained to professional income earned by a professional cyclist. During the period 2007-2009, said cyclist was engaged by a Belgian employer and participated in numerous races abroad. On the basis of articles 17 and 23, §1 a of the relevant double-taxation convention, the income thus earned was taxable abroad and, accordingly, a tax exemption (with reservation as to the progressive tax rate) was requested in the personal tax declaration in Belgium. As the Belgian Tax Administration disallowed such an exemption, the dispute was referred to the courts. In the Court of First Instance and in the Appeals Court, the Administration was rebuffed: given that the cyclist was primarily remunerated by the employer on the basis of his participation in races, the court saw no objection to allocating the taxation rights to the countries where said races were held, based on the number of racing days in which the cyclist had participated abroad.

However, the Belgian Tax Administration was of the opinion that an effective taxability mechanism was needed in the countries where the respective races were conducted in order to qualify for the personal tax exemption in the Belgian declaration.  Specifically, it was argued that income earned for races in the Netherlands was tax exempt in that country pursuant to the Dutch internal tax legislation and, hence, did not qualify for an exemption in Belgium. The Administration therefore took its case to the Court of Cassation but, alas, likewise in vain.  

The “subject to tax – clause”, interpretation according to the Court of Cassation
Article 23 §1 a of the double-taxation convention concluded between Belgian and the Netherlands reads as follows:

“In Belgium, double taxation is being avoided in the following manner:

In case a resident of Belgium receives income other than dividends, interest, or royalties in the meaning of article 12, paragraph 5, or owns items of capital that, pursuant to the provisions of this Convention, are subject to taxation in the Netherlands, Belgium shall deem such income or items of capital tax exempt. However, in order to calculate the amount of tax payable on the remainder of the income or capital of that resident, Belgium shall be entitled to apply the tax rate that would have been applicable if the exempted income or capital had not been so exempted.”


In the combined article-by-article explanation, pertaining to article 21 clarification is given as to when an income component is “taxable”, to wit: in case it is effectively included in the tax basis used to levy the taxes. As such, the Tax Administration contends that the income earned in the Netherlands remains taxable in Belgium in the absence of taxation in the Netherlands.

However, the Court of Cassation does not agree with the Tax Administration. The allocation whereby the taxation rights are being granted to the country based on the number of racing days on which the cyclist participated in races is, in the Court’s opinion, not contrary to the legal provisions obtaining. Furthermore, the Court states that effective taxability is not required in the context of the allocation of the taxation rights of article 17 of the convention (or other allocation rules such as article 15 or 16).

In this context, the Advocate-General further states that an argumentum a contrario is not admissible: in fact, it is not possible to transfer the taxing rights to Belgium on the basis of article 23 of the Convention. Should Belgium wish to tax a component that, on the basis of the allocation rules falls under the competence of the Netherlands but is exempt in that country, the Convention needs to be adapted in order to admit a ‘credit-system’ mechanism.  

The rationale of article 21 of the Convention whereby the non-taxability in the one State results in the other State’s ability to still proceed to levy tax (subject-to-tax clause)  cannot be extended to the other components of the income of which the taxing rights are regulated in the Convention’s other articles. The requirement of effective taxability should be read and interpreted with reservation in the sense of its being aimed at ensuring that an exemption can be obtained for earnings that are not subject to the other allocation rules. The actual allocation of the taxing rights on a given item of income in an earlier article hence is absolute and incontestable and the subject-to-tax clause of article 21 concerns only other income than that discussed in an earlier article.

The ruling of the Court of Cassation may truly be described as ‘revolutionary’, since it is diametrically in opposition to earlier standpoints embraced by the Belgian Tax Administration. The Court clearly holds the opinion that there exists no room for the so-called subject-to-tax clause, which it deems contrary to judicial tenets.

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