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May 2010

HR and tax alert

Belgium

Belgian and US tax authorities enter into a Competent Authority Agreement regarding the types of pension plan that qualify for treaty relief

Executive summary On 14 January 2010, the Belgian and US tax authorities signed an Agreement regarding the types of pension plans that will be deemed to generally correspond to a pension plan recognized for tax purposes in Belgium and the US. The purpose of the Agreement is to assist with the application of Article 17 of the tax treaty between Belgium and the US which is designed to provide relief from host country taxation of cross-border pensions. Background The new Belgium/US tax treaty entered into force on 1 January 2008. Article 17 of the tax treaty provides that individuals, who participate in their home country pension plan, go on assignment to the other country and continue to participate in the home country plan will ­ subject to meeting certain conditions: · Not be not be taxed in the host country on employer contributions to the home country plan · Be allowed to claim a tax deduction in the host country for personal contributions to the home country plan · Not be subject to tax in the host country on income earned by the pension plan unless a distribution is made In addition, the employer will be allowed a deduction for contributions to the pension plan in calculating its taxable income in the other country. Prior to this Agreement it has been necessary for any individual pension plan to be given approval to the effect that it is regarded as corresponding to a pension plan recognized for tax purposes. The Agreement sets out details of the types of Belgian and US pension plan that will be recognized for tax purposes in the other country. The types of pension plan listed in the Agreement is not exhaustive and it is open to any participant in a pension plan that is not expressly mentioned in the Agreement to ask the tax authorities of the relevant country to determine whether the pension plan is recognized for tax purposes for the purposes of applying Article 17. It is worth noting that, subject to meeting certain requirements, pension plans established in a country other than Belgium or the US may also be recognized for tax purposes. The types of pension plans that have now been specified in the Agreement are for both countries complementary retirement plans funded through employee's and/or employer's contributions, such as the 401(k) plan for the US and company group insurance plan in Belgium1 It is important to note that the so called "third pillar" where an individual voluntarily decides to fund future retirement income from funds outside of their employment income via a tax friendly vehicle such as "Individual retirement accounts" in the US or "pension savings" in Belgium are not qualified.

Next steps Companies and individuals should analyze the effect of the new rules to ensure the most tax efficient treatment is applied both at corporate and individual level.

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Qualifying US pension plans are : a qualified plan under tax code Section 401 (a), including a Section 401(k) plan; a Section 403(a) qualified annuity plan; a Section 403(b) plan; A Section 457(b) plan; and a Section 7701(j) thrift savings plan. Recognized Belgian pension plans similar to a qualifying US plan are contributions paid to a complementary retirement plan qualifying under article 52, 3°,b and 7°bis and article 59 of the Belgian income tax code and contributions paid to a complementary retirement plan qualifying under article 145, 1° and article 145,3° of the Belgian income tax code 1

Jean-Nicolas Lambert Tel: +32 (0)2 774 9264 email: [email protected] Pieter Nobels Tel: +32 (0)2 774 9468 email: [email protected] Robin Collard Tel: +32 (0)2 774 9328 email: [email protected]

This publication contains information in summary form and is therefore intended for general guidance only. It is not intended to be a substitute for detailed research or the exercise of professional judgment. Neither EYGM Limited nor any other member of the global Ernst & Young organization can accept any responsibility for loss occasioned to any person acting or refraining from action as a result of any material in this publication. On any specific matter, reference should be made to the appropriate advisor.

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doi:10.1016/j.intaccaudtax.2004.09.002