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Thursday, 24 February 2022

Non-compete payment upon the ending of an international career... Taxation in the residence state?

The Court of Appeal of Liège ruled in its judgement of 6 September 2021 that an executive’s non-compete payment is taxable in his residence state, even though he has been performing (part of) his professional activities abroad.

In the case at hand a Belgian individual had been working in France for a couple of years until he was repatriated to Belgium. His resignation occurred one year later, after which he concluded a non-compete agreement with his (Belgian former) employer. A non-compete agreement is an agreement in which an employee agrees not to enter into competition with an ex-employer. This obligation is almost always time-limited and often geographically limited. The agreement was concluded on the grounds that over the course of 32 years of employment the individual had acquired detailed and thorough knowledge of the functioning of several companies and business units of the group, having held important management positions. The individual claimed that the non-compete payment had to be exempted in Belgium based on the double tax treaty between Belgium and France.

The Court however ruled that the non-compete payment had to be taxed in Belgium, the executive’s state of residence at the time of signing and execution of the non-compete agreement. The Court also took into account that the non-compete agreement was not limited solely to the French territory.

The Court’s reasoning is as such in line with the OECD Commentary, which states that in most circumstances a non-compete payment does not constitute remuneration for employment activities performed before the termination of the employment. Hence, the non-compete payment is in principle taxable in the residence State of the recipient. It should however be pointed out that one cannot draw general conclusions, as the tax regime should always be assessed on the basis of the concrete facts.

The tax regime of a non-compete payment should furthermore be distinguished from the regime applying to a severance payment. According to the OECD Commentary, a severance payment paid in respect of a (legal) period of notice should be considered to be derived from the state(s) where it is reasonable to assume that the employee would have worked during the notice period (which will most often be the state(s) where the activities were performed for a substantial period of time before the employment was terminated). Hence, if for instance an individual is supposed to execute his notice period in France, the severance payment is in principle to be exempted in Belgium. These same principles apply to payments received as a recurrent salary during a so-called garden leave.

In conclusion, this judgement is in line with the OECD Commentary and another reiteration that the contractual agreement and type of payment agreed upon between (ex)-employer and employee have an important impact on the applicable tax regime.

Katrien Bollen – Senior associate (katrien.bollen@tiberghien.com)

Arif Keskin – Associate (arif.keskin@tiberghien.com)

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Tiberghien’s international tax team will continue to monitor these and other tax developments relevant for Belgium / Luxembourg based multinational enterprises. Our editorial board consists of: 

Koen Morbée (International and EU corporate tax, koen.morbee@tiberghien.com);

Michiel Boeren (International and EU corporate tax, michiel.boeren@tiberghien.com);

Ahmed El Jilali (International and EU corporate tax, ahmed.eljilali@tiberghien.com);

Katrien Bollen (HR tax and global mobility, katrien.bollen@tiberghien.com);

Ben Plessers (Transfer Pricing and Valuations, ben.plessers@tiberghien.com);

Gert Vranckx (VAT, customs, excises and other indirect taxes, gert.vranckx@tiberghien.com

Rik Smet (International and EU corporate tax, rik.smet@tiberghien.com)

 

In case you have further questions on this publication or want to discuss a tax query, please do not hesitate to contact the author(s) or one of the members of the editorial board. 

This newsflash is for information purposes only and cannot be relied upon as legal advice.

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