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Aug 24th
Home arrow International arrow International tax

Exemption with progression method

In the double tax treaties, Belgium generally uses the exemption-with-progression method to prevent double taxation.
That means that Belgium will not tax the overseas income. However, the taxpayer must declare it in his tax return. The tax authorities first calculate the tax on all the (taxable and exempt) income, determine te average tax rate on the (taxable and exempt) income, before applying that average tax rate on the taxable income only. In the tax return, he usually gives a deduction equal to the average tax rate over the exempt income.
Other countries apply the tax credit method. All income is liable to tax, but the taxpayer is entitled to a tax credit for the tax paid abroad. That means he can deduct the tax paid abroad from the tax due at home. However, the tax credit is limited to the domestic tax rate. If he has paid 50 % tax abroad while the domestic tax rate is only 40 %, his deduction will be limited to 40 %.
The exemption-with-progression method allows taxpayers to enjoy a lower tax rate and reduce the average tax rate on his worldwide income (see salary split [link]). In countries which use the tax credit method, they always pay at least the domestic tax.
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