On July 1, 2014, Belgium will undergo its sixth State Reform. As outlined in the Institutional Agreement, the purpose of the State Reform is to produce "a more efficient federal state and a larger autonomy for the federated entities." However, past State Reforms have resulted in an array of institutional bodies, agencies and sometimes overlapping competences.
To say that Belgium is a complex country is an understatement. Once a unitary state, Belgium has developed a system of federalism with power divided between the federal level, three language communities (Flemish, French and German) and three regions (Brussels, Flanders and Wallonia). As outlined in the Institutional Agreement, the purpose of the State Reform is to produce “a more efficient federal state and a larger autonomy for the federated entities.” Due to the different aspirations of these communities and regions, the country has undergone a series of State Reforms since 1970. This has resulted in an array of institutional bodies, agencies and sometimes overlapping competences.
A brief history
In 1970, the first revision of the Belgian Constitution resulted in the establishment of the three cultural communities. This was in response to the pursuit of cultural autonomy in Flanders. Additionally, 1970 saw the birth of the three regions. In response to the Walloons’ desire to have economic autonomy, each territory was expected to be active in the economic field. The second, third and fourth State Reforms elaborated upon these initiatives, shaping and cementing the regions and language-speaking communities that we know today and entrenching the country’s federalist state.
In 2001, the Lambermont Accord heralded the fifth State Reform, which transferred certain powers to the regions and communities, including local authority, provincial law and powers concerning agriculture, fisheries, foreign trade and investment. Additionally, the Accord provided for increased fiscal autonomy, including election financing.
The division of responsibilities after the Lambermont Accord can be summarized as such:
- Federal level: foreign affairs, finances & taxation, defense, the judicial system, social security and public health.
- Communities: culture and education
- Regions: economic matters, labor, the environment and international trade
The Butterfly Agreement
In October 2011, plans for the sixth State Reform were agreed in order to continue to transfer more powers to the regional governments and split the electoral constituency of Brussels-Halle-Vilvoorde, which had been a contentious issue for several decades.
“There will be no immediate impact on July 1, 2014.”
From July 1, 2014, the regions will have the ability to make legislative changes to select parts of the following policy areas including, but not limited to, the labor market, healthcare, family allocations and justice. However, there will be no immediate impact on July 1, 2014 as differences will only appear once regions change the existing legislation.
There will be no hierarchy between governments, and the regions will also have the ability to alter transferred powers, including the very definition.
Transferred powers: Labor market
While social security contributions will remain a federal competence, some matters will be transferred in order to give the regions increased economic autonomy, and hence, increased power to improve their competitiveness. This includes increased control over those in long-term unemployment. Thus, from July 1, 2014, it will be easier for employment agencies to locate and activate long-term unemployed persons.
Regions will also gain control of social security for target groups and will therefore be able to offer companies increased benefits for hiring long-term unemployed persons, young people, older employees, etc. Importantly, if regions offer tax reductions, they will compensate for the extra costs from their own budget, making it a zero-sum game for the Federal Government.
Regions will also gain control over economic migration, service vouchers and secondary professional education (i.e. the ability to combine pre-18 education with internships/apprenticeships).
Transferred powers: Healthcare, family allocations & miscellaneous
Regions will become responsible for the care of the elderly and the disabled, including homes and monthly allowances. Hospitals, mental healthcare and any kind of preventive healthcare (e.g. anti-smoking campaigns) will also be transferred to the regions. The Federal Government will remain responsible for more overarching health and safety concerns, such as the regulation of the food chain.
All variations of family allocations will be transferred, without exception. Several judicial powers will also be transferred including Article 144C, prosecution policy, juvenile penal law and management of ‘justice houses’. Other miscellaneous power transfers include road speed limits (except highways), truck weight limits, energy distribution tariffs, company lease rules and permits for commercial establishments.
The Special Finance Act consists of federal allowances, gathered at federal level via corporate tax, income tax, VAT, etc., which are then distributed to the regions. Significantly, the Special Finance Act, which includes a €20 billion budget transfer will only come into effect as from January 1, 2015.
“The Special Finance Act, which includes a €20 billion budget transfer will only come into effect as from January 1, 2015.”
The regions will be able to allocate this budget as they see fit. This will give regions the ability to implement tax reductions. Regions will also have fiscal autonomy on personal income tax. The advantage of this transfer is that, with their own income, regions will have increased accountability and a greater incentive to perform economically. One disadvantage, however, is that it has a potential negative impact on the tax calculation of foreign executives who benefit from the expatriate tax regime.
Since 1983, Belgium has had an attractive tax regime for foreign executives who temporarily work in Belgium, as they are considered as non-resident taxpayers for income tax purposes. The Chamber played an instrumental role in the development of this beneficial regime. For expatriates, all personal income from non-Belgian sources (e.g. interest, dividends) is not taxable, and foreign executives could also receive marital quotients, tax reductions on mortgage loans, a travel exclusion benefit and other tax-free allowances. Many foreign executives with expatriate status reside in Belgium with their families and were viewed as privileged non-resident taxpayers (i.e. non-resident taxpayers with Belgian residency during the taxable period or non-resident taxpayers earning at least 75% of their total professional income in Belgium).
Unfortunately, as matters relating to personal income tax are to be transferred to the regions, in April 2014, the Income Tax Code of 1992 was amended in order to facilitate this transfer. As of tax year 2015 (income year 2014), only non-resident taxpayers with 75% Belgian source income and from an EU Member State origin will benefit from full tax deductions (personal, federal & regional); non-resident taxpayers with 75% Belgian source income and not from an EU Member State origin will benefit from personal and federal tax deductions (and therefore not from the regional ones); in the other cases (i.e. executives having less than 75% Belgian source income), the non-resident taxpayers will have no benefit from personal deductions (personal tax relief, marital tax credit, child tax credit) and regional deductions (cost to acquire/maintain own dwelling, service vouchers, etc). The expatriate tax regime is therefore no longer a competitive advantage for foreign executives, especially if they travel more than 25% of their time for business purposes.
While, in theory, the sixth State Reform is supposed to promote efficiency, the future governments must take care to ensure the transfer of competences does not increase the administrative burden for citizens and companies. Companies with sites spread across different regions should not have to operate under wholly different legal and regulatory frameworks. Moreover, the changes to the expatriate tax regime forewarn of the negative impact the sixth State Reform could have on Belgium’s competitiveness – in this case, the ability to attract foreign talent. As the regions start to exercise their new competences, it is possible that companies will encounter more unwelcome changes to existing beneficial legislation.
AmCham Belgium urges the regions to prioritize Belgium’s competitiveness above all else in the implementation of the sixth State Reform.