ECJ condemns Belgian tax on second residence abroad

Belgium has been condemned again by the Court of Justice of the European Union for its tax regime for a second home in another Member State.

The issue is not new and not always well understood.

Belgium charges tax on all real estate owned, even if you do not receive rent for it.

If you only own the house you live in, you do not need to declare anything at all, unless you let out part of your house.

If you have a second residence, or a property that is let, you declare the cadastral revenue . That cadastral revenue will be increased with 40% and corrected for inflation. Roughly speaking you pay tax on 2.5 times the cadastral revenue.

If you own property abroad, the rules are different. You have to declare either the actual rent you receive (if it is let out) or the rental value for a second residence.  The rental value is the rent you would receive from a tenant if it was let out. In general, the best thing to do is ask an estate agent to give you a rental value. You cannot take any deductions for expenses, but the tax authorities automatically deduct 40% to cover maintenance and repairs. You can, however, deduct the income tax you paid on the property abroad.

Theoretically, the tax regime for property in Belgium and property outside Belgium should be the same because the cadastral revenue is the theoretical rental value of a property in Belgium. However, the cadastral revenue was last set in 1975 and despite indexation it does not reflect the current rental value of a house. This means that overseas property is subject to a higher taxation in comparison to a Belgian property.

There is a difference. Property income in another country is usually exempt in Belgium under the terms of the double tax treaty between Belgium and that country. Nevertheless, Belgium takes account of this income when determining the tax rate applied to other taxable income in Belgium. This is called “exemption with progression”.  The overseas property income will push the Belgian income higher up in the progressive tax rates.

In 2014, the Court of Justice of the European Union already declared that the obligation to declare the rental value for an overseas property was an infringement of the free movement of capital guaranteed by European law (case C-489/13, Verest and Gerards). Belgium had already admitted as much in 2012. On 12 April 2018, the European Court has condemned Belgium again (case C‑110/17 Commission v. Belgium).

This means that Belgium will have to amend its legislation to ensure that real estate in Belgium and outside Belgium is treated in an equivalent manner, but the European Court has not given any suggestions to resolve the problem. The decision will be either to increase the tax on Belgian property or to accept another form of valuation for property. For second residences the tax authorities are already accepting the French equivalent for the cadastral revenue, the “valeur locative”, but not all countries have such equivalent. They take account of the market value of the property, in that case they accept a fixed value such as 2% of the Spanish “valor cadastral” or 4% of the value of real property in the Netherlands .

A solution might be to simply exempt the income from overseas property without progression. Only time will tell.

Author: Marc Quaghebeur

Marc Quaghebeur is a Belgian tax lawyer with Cabinet DAVID specialising in international tax issues and cross border estate planning. He is a member of the Brussels Bar and the Society of Trust and Estate Practitioners. He

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