The Programme Act of 27 April 2007, published on 8 May 2007 in the Belgian Official Gazette, modified the existing regulations regarding the liability of the principal with respect to the social security and tax debts of the contractor as well as of the contractor for these debts of sub-contractors as specified in article 30bis of the Act of 27 June 1969 on the social security of workers and in articles 400 to 408 of the 1992 Income Tax Code. The new regulations entered into force as of 1 January 2008.
The existing regulations, which were intended to reduce tax fraud and discourage the use of undeclared workers in the construction sector, consisted of an optional system of registration of contractors/sub-contractors, imposing significant differences between the categories of registered and unregistered contractors.
A principal who hired an unregistered contractor to carry out construction work was made jointly and severally liable for the social security and tax debts of the contractor (respectively up to 50% and 35% of the amount of the works – excluding VAT). In addition, the principal was obliged to withhold, at the time of payment, specific percentages (15% for social security and 15% for tax from the amounts paid to the contractor). These withheld amounts were then to be turned over to the social security and tax administrations, respectively.
As with respect to the relationship between the contractor and an unregistered subcontractor, a similar regulation was made applicable for certain categories of construction works, except that the withhold percentages from the amounts to be paid to the subcontractor were 35% for social security and 15% for tax.
Although the registration was not obligatory, in practice most contractors found that they did not have any real choice.
In a judgment of 9 November 2006, the European Court of Justice condemned Belgium with regard to the above-mentioned system. It stated that the obligation to withhold a certain percentage for the benefit of the social security and tax administrations and the joint and several liability of the principal constituted a limitation on the free movement of services in the European Union.
In practice, this regulation had far-reaching disadvantages with respect to foreign unregistered contractors, since they were discouraged from offering their services in Belgium. At the same time, Belgian principals and contractors were not eager to hire unregistered foreign contractors.
Following this judgment, the tax administration suspended the withholding obligation and the joint and several liability with respect to foreign employers, i.e. principals or contractors. The social security, however, maintained its position, since there was already an exception regarding foreign employers.
The new regulation, which entered into force on 1 January 2008, disassociates the registration system from the joint and several liability and the withholding obligation. The criterion is no longer the registration (or not), but rather the existence of social security and/or tax debts.
The key moment of the operation is that of payment for the provided services. The principal (or, as the case may be, the contractor) will have to check the social security and tax administration databanks (although the tax administration databank is not yet operational, therefore all deductions are suspended for the time being), to verify whether their contractor (or subcontractor) has social security and/or tax debts. The distinction between social security and tax debts is also a new aspect of the amended law, whereas in the past the withholdings automatically concerned both the social security and the tax administrations. If the (sub)contractor only has social security debts, the withholding and the joint and several liability of the principal/contractor only apply to these social security debts; equally, if the (sub)contractor only has tax debts, the withholding and the joint and several liability of the principal/contractor only apply to these tax debts. If this is the case, the joint and several liability will arise once again for the principal's/contractor's works, (the regulations are not applicable to natural persons for construction works for private use) and the withholding of 35% for social security contributions (but limited to the amount of the social security debts) as well as 15% for tax purposes (also limited to the amount of the tax debts) will kick in. However, the joint and several liability (which in any case is limited to the total amount excl. VAT of the works) is no longer applicable if the principal/contractor correctly executes the withholding and payment to the proper administrations.
If the principal/contractor fails to withhold and pay to the proper administration the above-mentioned amounts, the sanction is equal to twice the amount which should have been paid.
In the new system, the social security administration maintains the exception with respect to foreign contractor-employers on the condition that the latter have no social security debts in Belgium and that all their workers are in the possession of a valid secondment certificate.
The registration system for contractors will be maintained, however, although there might be some questions as to its benefits. Nevertheless, the registration remains useful with respect to other tax-related questions and advantages and will serve as a quality label concerning the contractor. In the future, applications for the registration of foreign companies will be handled by a separate, central commission.
This law has not been fully implemented yet, and although it entered into force on 1 January 2008, many steps need to be taken in order to assure its full functioning.