Indemnities for dismissal and remuneration arrears: change in tax treatment

Up to now, income such as indemnities for dismissal and remuneration arrears have been taxed separately “at the average tax rate applicable on the total of the taxable income of the last previous year during which the taxpayer had a normal professional activity”.

An Act of 7 April 2019, published in the Belgian State Gazette of 3 May 2019, changes this tax treatment with retroactive effect as of 1 January 2018. From then on, the reference year will be the last calendar year during which the taxpayer received taxable professional income during 12 months.

Indemnities for dismissal and remuneration arrears have a specific character. To curb the progressive nature of the personal income tax system, these were in principle taxed separately at the average tax rate of the last previous year during which the taxpayer had a normal professional activity.

This resulted in a discussion with regard to the notion of “the last previous year during which the taxpayer had a normal professional activity”. Some presumed it sufficed to receive professional income (such as unemployment benefits or the legal pension), while others, followed in their reasoning by the Supreme Court, argued that you should refer to the last year during which the taxpayer had worked twelve months.

The Act of 7 April 2019 changes this tax regime retroactively with effect as of 1 January 2018. To put an end to the controversy and to end the jurisprudence of the Supreme Court, from now on reference will be made to “the last previous year during which the taxpayer had twelve months of taxable professional income”.

In practice, this means that, for example, if a taxpayer has, during the last calendar year, worked during three months and received unemployment benefits during 9 months, the average tax rate that will be applied on the indemnity for dismissal will be calculated on this last calendar year and not on the last calendar year during which the person in question effectively worked during 12 months.

This means as well that the mere exercise of a professional activity (e.g. in the framework of a one-man business) no longer suffices if this activity does not result in taxable professional income for the taxpayer.

> Key message
This change in legislation has no direct impact on withholding tax, but should be advantageous for the taxpayer at the moment of final taxation.