New Tax Rules for Overseas Properties

The European Court of Justice has 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).

Discrimination of owners of overseas properties.

In the case of real property in Belgium, whether that is a second residence or a buy-to-let, the tax is calculated on 140% of the (indexed) cadastral revenue (unless the tenant is a professional or a company).

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.

Of course, properties do not have a cadastral revenue. France has its own valeur locale cadastrale, Spain has a valor cadastrale (but that is the value of the property) and Italy has a rendita cadastrale, but these are not a workable alternative.

If you own a property abroad, you have to declare the gross rent received or, in the case of a second residence, the rental value. This rental value is the rental income you would normally receive if it was let. You cannot deduct any expenses for maintenance or repairs, but the tax authorities calculate the tax on 60% of the rent or rental value. Yet, the income tax paid in the other country can be deducted.

Exemption with progression

Belgium has signed a double tax treaty with all EEA Member States so that there should not be a problem. The problem is that the higher tax is an indirect higher tax.

Under the double tax treaties, rental income abroad must be exempted in Belgium, but Belgium exempts “with progression”. This means that Belgium looks at all the taxpayer’s income including the rental income or the rental value and calculates the average tax rate, e.g. 42%, and then takes out the 42% tax of the overseas rental income. 

The overseas income is exempt, but it pushes your other income (the income that is liable to tax in Belgium) higher up in the progressive tax brackets. If you did not have that rental income, your average tax rate might have been only 35%. If Belgium taxed something similar to the cadastral revenue, your average tax rate might only be 38%. It is that difference between 38% and 42% that is the problem.

European law

The decision of the European Court of Justice was not unexpected. In 2014 and in 2018, the Court had already said this.

The Belgian tax authorities had sort of tried to find a compromise without changing the law but that did not sway the European Commission or the Court. On 12 November 2020, the European Court of Justice has condemned Belgium to pay a fine of €2 million with a penalty payment of €7,500 for every day the rules are not changed  (case C-842/19).

And now. Tax lawyers saw three options: the easy one is to exempt the overseas rental income – easy and clean as there is not much tax involved; discriminate the Belgian residents who are not complaining. An alternative that would be harder to introduce would be to tax all rental income of Belgian properties. That would be most unpopular, and that is a word that politicians dislike.

The third option: tax all overseas properties in the same way as Belgian properties, but without a cadastral revenue equivalent to the Belgian cadastral revenue, that would be hard to implement.

Trust the new Finance Minister chose the third route.

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

Simple, in the same way as we determine the cadastral revenue for a Belgian property, by starting from the “normal net rental value” on 1 January 1975 of the property itself or of an “appropriate reference plot”; and if no such reference plot is available, we take 5.3% of the normal sales value of the property on 1 January 1975.

However, if there is no reference to determine the normal sales value on 1 January 1975, we will take the ” normal sales value” today with a “correction factor” that will be determined every year and announced every year by the Finance Minister. For 2020, this correction factor is 15.036.

The Finance Minister apparently assumes that there will be no (workable) reference so that the cadastral revenue will be 5.3% of 1/15.036 of the normal sales value. The cadastral revenue will, therefore, be €353 per €100,000 of the value of the property.

However, it is to be noted that this formula is not limited to overseas properties.

When you buy a property in Belgium for €500,000, the Belgian tax authorities could argue that the cadastral revenue is €1,765.

As for unbuilt land, the same rule will apply but, just like for Belgian land, the minimum value will be €2 per hectare.

And how does the tax office know the cadastral revenue of your overseas property?

If you own an overseas property on 31 December 2020, you have one year to report the cadastral value make this declaration (until 31 December 2021). If you are already reporting income from overseas properties in their tax returns, you will be invited by the tax administration to give the relevant information in 2021.

When you buy or sell an overseas property, you will have four months to report this to the tax office (‘l’Administration générale de la documentation patrimoniale’).

It is to be noted that if you have done anything to increase the value of a property in Belgium, you have thirty days to report that

• newly built or rebuilt properties are occupied or let out ;
• that the works have been completed to modify an building;
• when the land is converted or improved;
• when material or equipment (on which the cadastral revenue is also liable to income tax) are commissioned or decommissioned.

 This may result in a change of the cadastral revenue.

Failure to report the sales value will result in penalties between €250 and €3,000, on a scale to be determined in a Royal Decree. This fine is new for overseas property, but it will be extended to everyone who forgets to report improvements or existing real property.

When?

The changes will take effect for tax year 2021, i.e. from 1 January 2021. For our tax return in 2022, we will have to declare this new cadastral revenue for overseas properties, but the Belgian tax authorities could not stop taxpayers from using this formula in their 2021 tax returns for 2020.  They have the case law of the European Court of Justice with them.

The devil in the detail

However, it is to be noted that this formula (“5.3% x 1/15.036 x the normal sales value’) is not limited to overseas properties.

When you buy a property in Belgium for €500,000, the Belgian tax authorities could argue that the cadastral revenue is  €1,765 and revalue the cadastral revenue.

Moreover, this may lead to a complete overhaul of the tax rules of Belgian real property.

The idea was that the rental value of properties would be recalculated every ten years, but linking the cadastral revenue to the consumer price index was easier. However, applying the same percentage adjustment to the cadastral revenue of every property could become discriminatory.  The Quartier Leopold used to be a working-class district, but with the growth of the European Institutions has caused rents to skyrocket. In the meantime, flourishing middle-class neighbourhoods that were built around 1975 have become impoverished but the owners still pay tax on cadastral revenues that are far too high.

Linking the cadastral revenue to the sales value of a property could correct these inequities.