How do you tax overseas real property …

… without infringing European law?

After the European Court of Justice ordered Belgium to change its rules on the taxation of overseas properties and to pay a penalty of €2 million and a daily payment of €7,500 (for prior coverage see here). Finance Minister Vincent Van Peteghem rolled out an ambitious plan to set up register of all properties held by Belgian residents all over the world and give them a ‘cadastral value’.

That allows him to tax all overseas properties in exactly the same way as Belgian properties, but without a cadastral revenue equivalent to the Belgian cadastral revenue, that would be hard to implement.

Each property in Belgium is registered with the land register (‘cadastre’), where it gets a value for tax purposes, the `cadastral revenue’. Historically, the cadastral revenue is the theoretical rental value for the property, but (generally speaking) it is the theoretical annual rent the property could have been let for on the open market on 1 January 1975. The idea was that this would be reviewed every ten years, property by property. In the nineties, the legislator decided that it was easier to link the cadastral revenue to the consumer price index.

But how do you determine a cadastral revenue for overseas properties?

The tax authorities have sent out 170,000 forms last week to determine the cadastral revenue of overseas real estate.

The new tax regime comes after Belgium has been condemned several times by the European Court of Justice. The problem was the unequal tax treatment of properties in Belgium (based on the cadastral revenue) and properties abroad (based on the rent or the rental value). To eliminate the discrimination, overseas real property will also be taxed based on the cadastral revenue. (see “New Tax Rules for Overseas Properties”).

I own a property abroad

If you already own overseas real property, you must report the rent or rental value in your annual tax return. With that information, the tax authorities sent out 170,000 forms. If you bought a property abroad in 2020, you will declare it for the first time in this year’s tax return. You will then receive the form in September or October.

If you have activated your eBox, the government’s electronic mailbox, you will receive the digital form there. Otherwise, you will receive a paper form in the mail. The return can be submitted online via MyMinfin or on paper (Dutch/French). You can scan and send it to [email protected] or you can send it by mail to the address on the form.   This must be done by 31 December 2021 at the latest. If you do not receive a form, you will have to file a declaration spontaneously.

Who should file a return?

Everyone who owns real property outside Belgium must file the return, as well as anyone who has usufruct, a long lease (‘emphythéose’), a building lease (‘droit de superficie’). What is remarkable is that owners of bare ownership also have to fill in the form. There is no legal basis for this and it is not relevant because they do not have to declare any income in their tax return.

The declaration is individual. Partners who are joint owners must each file their own return. And if you have several properties abroad, you have to submit a separate return for each of them.

What information does the taxman want?

The form first asks for the type of property (villa, flat, land…) and the address. Then you have to provide information about your share in the property. If you and your partner own a foreign property and you both have to fill in ‘1/2’. Other ownership relations are also possible. If you have half in full ownership and a quarter in usufruct, you write ‘3/4’.

In the same box, you must tick whether you have acquired the property before or after 1 January 2021. This is not required by law, and it can cause problems for taxpayers who have not correctly declared their overseas real estate in the past.

On what value is the cadastral revenue calculated?

The cadastral revenue is not an actual but a theoretical income: the average normal rental income at a reference date, which is still 1 January 1975.

If you cannot provide the average rental income on 1 January 1975, the tax authorities reconstruct the 1975 sales value based on the current sales value. This is the price that can be obtained under normal market conditions for a voluntary sale, excluding additional costs such as taxes. You can estimate the current normal sales value, but for complex properties, it is advisable to call in an expert. There are no rules regarding the criteria that the expert must meet, and there is no list of recognised surveyors per country or region.

The tax authorities will then calculate the normal sales value on 1 January 1975 by dividing the value today by a correction factor of 15.018. A house worth €450,000 now would have been €450,000 / 15.018 = €29,964 in 1975; the cadastral revenue is 5.3% or €1,588.

If there is no recent expert valuation, you can use the purchase price and the costs of any renovation or construction.  For a property bought for €200.000 in 2009, the cadastral revenue is calculated as 5.3% of 200,000 / 12.212 = €434. The coefficient for 1975-2021 can be found in the practice note (at 2.2.1).

For land, the new scheme assumes a standard value of 2 euros per hectare.

I am building or renovating, but the work is not yet finished. What do I have to declare?

At present, you report the value of the property today, before the work is carried out. The cadastral revenue is then determined by the Belgian tax authorities. When the works are completed, you must fill in a specific return and a new cadastral revenue will be determined.

Refurbishments and renovations can lead to a revaluation of the cadastral revenue. This goes up after the installation of an extra bathroom, the conversion of an attic into a bedroom or the addition of a swimming pool. Traditional renovations that increase the living area, such as adding a veranda, also increase the cadastral revenue.

What if I do not agree?

As soon as the cadastral revenue has been determined, you will be informed by registered letter. If you do not agree, you have two months to file an objection.

What if I bought or am buying foreign real estate in 2021?

If you bought an overseas property or if you are in the process of buying one, you must submit a return declaration within four months after the purchase. If you bought a property in the first half of 2021, you could already report the purchase by e-mail or by mail. If you did, you will receive a form to report the property.

Now, you can report a new purchase online via MyMinfin or with the form above.. You must also report when you sell or inherit an overseas property.

Tax regime

The cadastral revenue will be used to determine the taxable base of all properties abroad, whether they are a second residence (and not let out) or let out to private individuals.

The taxpayer reports the cadastral revenue. The tax is calculated on the cadastral revenue x 1.4 c 1.863 (for 2021, 1.8492 for 2020, …).

If the tenant is a company or an individual who uses it for a business, the owner must declare the rent he receives. He cannot deduct any expenses for repairs or maintenance, but 40% is deducted automatically to cover such expense (however, that 40% deduction is limited to 3.05 times the cadastral revenue).

Until this year, one could still deduct overseas taxes, but that is not possible anymore. 

In practice, the rental income from the overseas property is not taxed, as Belgium must exempt that rental income under the double tax treaties Belgium has signed with more than 90 countries. However, the Belgian tax authorities can take account of that income to determine the tax rate on other taxable income.

Belgium gives treaty relief by way of “exemption with progression”. This means that Belgium adds the income from the property to the taxpayer’s other taxable income to calculate the average tax rate. Belgium applies the tax rate that applies to the income that is taxable in Belgium but exempts the overseas income. 

This pushes the Belgian remuneration or pension in the higher tax brackets. The impact is not the same for all taxpayers, as it depends on the amount of other income; taxpayers without taxable income will not feel the effect.

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