Properties abroad: ECJ puts pressure on Belgium

Second residences abroad are taxed more than in Belgium

Belgium taxes houses and apartments abroad more heavily than houses and apartments in Belgium. The Court of Justice had already found this in 2014 and 2018 and has now condemned Belgium to a penalty of €2 million and a daily payment of €7,500.

Different tax rules

This “heavier tax burden” relates to the fact that the tax base for overseas property held by Belgian taxpayers is much higher than the tax base for Belgian property.

in the case of real property in Belgium, whether that is a second residence or a buy-to-let, the tax is calculated on the 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.

The taxable income is calculated as 140% of the indexed cadastral income.

For 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.

If you own property in a country that has signed a double tax treaty with Belgium, you need to declare the rent or the rental value (normally in codes 1130/2130, see the list) and Belgium will exempt the rent or the rental value. If there is no treaty, the codes are 1123/2123 and Belgium exempts half of the income.

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.

When there is double taxation of income, governments sign “conventions for the avoidance of double taxation”. In these double tax treaties, they agree which of them can tax the income. More importantly, the treaty also says what they must do to prevent double taxation, that is “treaty relief”. 

For rental income abroad, all treaties say that the income is taxable in the other country and that Belgium must give treaty relief. Belgium gives treaty relief by way of “exemption with progression”. This means that Belgium looks at all your 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

In 2014, the Court of Justice of the European Union already found 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 admitted as much to the Commission in 2012.

In a practice note of 29 June 2016 in respect of second residences, the Belgian tax administration accepted that the ‘rental value’ to be taken into account may in principle always be replaced by ‘the fictitious income’, established or explicitly approved by a foreign authority, of the property abroad.  By way of an example they referred to the valeur locale cadastrale for French properties.  

In practice, the tax authorities accept that one declares the valeur locale cadastrale for France, the 2% of the valor cadastrale for Spain, the rendita cadastrale plus 5% in Italy, etc. Furthermore, there is case law that accepts 22.5 % of the rental income as a valid alternative for the cadastral revenue.

Four years later, the Court of Justice also found that the income from real property abroad let to a private individual who uses it for non-professional purposes (or to certain legal persons with a view to making it available to one or more private individuals) was taxed more heavily than income from comparable real property in Belgium. Belgium was again scolded for infringement of the free movement of capital (case C‑110/17 Commission v. Belgium).

Belgium must change this rule but the political will to do so is lacking.

After the second decision in 2018, the European Commission urged Belgium to comply with the case law of the Court of Justice. In the absence of a sufficient response from the Belgian authorities, the Commission finally asked the Court of Justice on 19 November 2019 to formally condemn our country for not implementing European case law.

In its defence, the Belgian State had pointed out, among other things, that the criticism of the Court’s (first) decision had already been addressed with a practice note of 29 June 2016.   That did not satisfy the Court; the practice note is not sufficient since it only covers non-rented real property abroad. Furthermore, the Belgian State seems to have shot itself in the foot as it had admitted in its answer to the Commission that the problem must be tackled by a change of the law and that has not happened.

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?

The Belgian authorities have to change the rules to make sure that overseas houses and apartments are not taxed more heavily than Belgian houses and apartments. How can they do that?

  1. Some people have suggested that Belgium could eliminate the discrimination by taxing Belgian houses and apartments in the same way, i.e. by taxing the gross rental income or the rental value. However, that is not what the European Court of Justice is asking, and no political party is keen to introduce such unpopular new tax measures.
  2. They could try to apply the Belgian rules to properties abroad, but that is very difficult. The solution might be what the Court of Appeal in Liège decided, i.e. to calculate the tax on 22.5% of the rental income.
  3. The simple solution would be to exempt the overseas income without progression.

Finance Minister Van Peteghem has promised to come up with a solution in the coming weeks. To be continued …

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