Recent developments regarding wage withholding tax exemptions

This alert highlights two developments in March 2023 relevant to Belgian employers concerning payroll incentives, specifically wage withholding tax exemptions. The first is the proposal to increase the tax authorities’ resources to strengthen the focus during audits on the application of wage withholding tax exemptions. The second concerns the interpretation of the concept of work of the same magnitude which is fundamental to the application of the partial wage tax exemption for night or shift work.

Strengthening of tax audits

The federal government’s budget agreement reached in March 2023 provides for a strengthening of tax audits, in particular to focus on exemptions from payment of wage withholding tax. To this end, 38 additional full-time equivalents (A1 level civil servants) would be assigned to these targeted controls, with the intention of generating additional annual revenue of EUR 20 million from 2024. The minister of finance will have to make a proposal to the government in this respect by the end of July 2023.

In this context, it is more than ever recommended that companies take proactive measures and critically examine and evaluate the implementation of exemption measures as well as the availability of supporting documentation to address any queries that may be raised during a tax audit.

Work of the same magnitude: A discriminatory condition?

The second development concerns the concept of work of the same magnitude which is at the heart of article 275/5 of the Income Tax Code (ITC), the legislation providing for an exemption from payment of the wage withholding tax for companies in which work is organised according to a system of shift work or night work (except for the construction sector which has a specific regime).

This tax measure stipulates that "enterprises where shift work is performed are those in which the work is performed in at least two shifts comprising at least two workers, who do the same work, both in terms of its purpose and its magnitude, and which follow each other in the course of the day without there being any interruption between successive shifts, without the overlap exceeding one quarter of their daily tasks and for which all workers who perform shift work receive a shift premium."

The imprecise wording of the law and the tax authorities’ increasingly restrictive interpretation of the notion of the same magnitude of work frequently result in lengthy discussions during tax audits and lead to numerous disputes, some of which end up before the Belgian courts. Although the law of 28 March 2022 has largely rewritten article 275/5 of the ITC to tighten the conditions of application, the legislator did not take the opportunity to clarify the notion of work of the same magnitude, which was considered too sensitive in view of the potential tax implications.

According to the administrative commentary, the condition of work of the same magnitude must be assessed at the level of successive shifts rather than at the level of the individual activities of the workers who make up these shifts (see FAQ 3 of Circular 2019/C/42 of 27 May 2019 on the exemption from payment of the withholding tax on professional income for shift and night work (Dutch │ French)).

On 19 January 2021, the Antwerp Court of Appeal ruled that the requirement for work of the same magnitude was not met in the case before it (which concerned vehicle recovery work), due to too great a variation in the number of call outs between the successive shifts. This led the court to refuse to apply the tax exemption to the employer.

The employer brought the case before the Belgian Supreme Court (Cass. 24 March 2023, F. 21.0100.N), which decided to submit a preliminary question to the Belgian Constitutional Court on whether the assessment of work of the same magnitude at the level of successive shifts leads to a prohibited discrimination (in the absence of reasonable and objective justification) by automatically excluding employers active in sectors characterised by a variation in the magnitude of shift work according to peak and off-peak hours. Such interpretation of the eligibility condition would have the effect of reserving the benefit of the measure only to companies in which successive shifts always carry out the same magnitude of work, e.g., in the context of assembly line work.

Such a difference in treatment between employers seems difficult to justify in view of the initial objective of the measure, which is to take account of the additional costs of employment in a shift system, and the explanations put forward to the European Commission to justify that the measure does not constitute illegal state aid because it covers almost all economic sectors.

It will be interesting to see what the response of the Constitutional Court will be and whether the case law will be able to clarify the intricacies of this notion, thus eliminating the uncertainties and endless discussions that taxpayers face during tax audits.