In a decision of 3 June 2021, the Constitutional Court ordered a major change of the Belgian inheritance tax code, or rather the three regional inheritance tax codes.

The Court ruled that the inheritance tax legislation in all three regions, is discriminatory, where it grants a credit for overseas inheritance tax on foreign real property, but not for overseas inheritance tax levied on movable assets situated in another country.

Inheritance tax in Belgium

Belgian inheritance tax is due on the worldwide estate of a Belgian resident, i.e. a deceased person who had his tax domicile in Belgium. When a non-resident dies, Belgium also charges inheritance tax but only on the real property he had in Belgium, and so do most other countries.

Many countries like Sweden, Canada, Australia, Portugal have abolished inheritance tax or have large exemptions (like Italy, Spain, …).

When a deceased Belgian resident leaves real property in another country that charges inheritance tax, the other state will charge inheritance tax on that property.

However, some countries, like Spain, the UK and the US charge inheritance tax on movables held by non-domiciled individuals and that results in double inheritance tax.

… and foreign tax credit

To mitigate double inheritance tax, Belgian law, as it is currently applied by the three regions, will grant a foreign tax credit but only for inheritance tax paid on overseas real property. The heirs can then credit the inheritance tax they have paid in the other state against the inheritance tax due in Belgium.

E.g. If the deceased owned a house in the other state, the inheritance tax there may be €30,000. If the Belgian inheritance tax on that property is €50,000, the heirs can deduct (“credit”) the €30,000. They pay €50,000 in total: €30,000 abroad and €20,000 in Belgium.

They must have paid the foreign inheritance tax; they have to provide proof of payment of the foreign tax with a certified copy of the inheritance tax return and the calculation of the inheritance tax.

This foreign tax credit does not exist for overseas inheritance tax on movables, such as shares and bonds. Not many countries charge inheritance tax but Spain, the UK and the US charge on assets that are located or deemed – by law – to be located in the country. This is the situs.

E.g. if the deceased had been working for a US company and had acquired stocks of the company, these are deemed to be US situs and liable to the Federal Estate Tax at a rate of 40% over $60,000 ($120,000 for a couple).

Until now, the Federal Estate Tax could not be set off against the Belgian inheritance tax. Nevertheless, the tax administration allowed a deduction of the foreign tax from the taxable base (the value of the shares) but only if the overseas inheritance tax was levied on the estate as a whole (an estate tax) rather than on the heirs personally (an inheritance tax). The UK inheritance tax, the Canadian Estate Tax and the US Federal Estate Tax are all estate taxes, the Belgian inheritance tax is an inheritance tax. It is calculated per heir.

E.g. if the stocks are worth €500,000, and the Federal Estate Tax is 40%, the Belgian inheritance tax is (was) calculated on €300,000 so that the total inheritance tax in the US and in Belgium could be as high as 58%.

Belgium has concluded two inheritance tax treaties, one with Sweden, dating back to 1956 and one with France from 1959. An estate tax treaty with the US has been signed in 1954, but it was never ratified by Belgium. The treaty with Sweden has become irrelevant as Sweden has abolished inheritance and gift tax with effect from 1 January 2005. In the treaty with France, the foreign tax credit has been extended to certain categories of movables. Furthermore, each state (even the state of situs of the assets) keeps the right to tax with reservation of progression, but the state of residence must give a tax credit for the inheritance tax paid in the state of the situs.

Background

The plaintiffs are the widow and the children of Mr Boer, a Belgian resident who died in Spain in 2007 at a time when the inheritance tax there was much higher than now. Most autonomous communities nowadays grant large tax exemptions and tax reductions of up to 99% for spouses and descendants.

The heirs reported the whole of his estate, with Belgian and Spanish assets, in his Belgian inheritance tax return. They also filed an inheritance tax return in Spain for his Spanish estate. Under Spanish law, inheritance tax is due on all assets that are physically or legally located on the Spanish territory, in this case, a house and the Spanish bank accounts.

The heirs requested a tax credit for the Spanish inheritance tax on the house and for the Spanish inheritance tax on the bank accounts.

For lack of a law granting the foreign tax credit, the Belgian and later the Flemish tax authorities refused.

After years of litigation, the Supreme Court was finally persuaded to refer to the Constitutional Court.

Is it not against the principles of equality and non-discrimination to give a foreign tax credit for overseas real property, but to refuse it for overseas movables, such as bank accounts?

The Constitutional Court

In its decision of 3 June 2021, the Constitutional Court said that it was. There is no reason to discriminate between the inheritance tax on overseas real estate assets and the inheritance tax on movable assets in another country.

The Court went one step further and as good as ordered the judge to give the heirs the foreign tax credit for the inheritance tax on the bank accounts, without waiting for the regional legislators to change the law and to give a foreign tax credit for the inheritance tax on movable property paid abroad.

The Flemish government had anticipated the setback and asked the Court to limit the effect of its decision to the future, but the court refused.

(the legislation concerned was the Flemish inheritance tax) to be allowed to maintain the effects of Article 17 of the Inheritance Tax Code for the past.

And now?

The good news is that the Finance Minister of the Flemish Region has already said that he is not in favour of solving the discrimination by completely cancelling all foreign tax credit both for overseas movables and for overseas real property. 

This means that heirs who have paid too much inheritance tax because they were refused or did not request the foreign tax credit on overseas bank accounts and other assets, can claim the tax back but they must do that within two years after the tax has been paid.

The minister has given his administration instructions to examine all the consequences of the decision, but he expects that the impact will be rather limited. He thinks that it is unusual for countries to charge inheritance tax on movables owned by non-residents (like Spain) and he assumes that the value of movables held abroad is usually less than the value of real property.

Pending the intervention of the regional legislators in order to bring their legal provisions into line with the ruling of the Constitutional Court (by providing for a reduction of the inheritance tax also for movable property subject to inheritance tax abroad), taxpayers who have been confronted with a case of double taxation on movable property held abroad are invited to apply for a reduction of the Belgian inheritance tax to the competent tax collector (knowing that the text of article 17 of the Code of inheritance tax limits the refund of inheritance tax to a period of two years from the date of payment of the tax).

Published by 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. View more posts

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