Are foreign taxes deductible from your inheritance in Belgium ?
If you are domiciled in Belgium when you pass away, your worldwide assets are normally subject to Belgian (regional) inheritance taxes. A different set of rules and tax rates exist in Flanders, Brussels, and Wallonia. They all have in common that both real estate and movable assets, in Belgium and abroad, will be subject to Belgian inheritance tax.
The beneficiaries of your estate, wherever they live, are personally liable for this tax. They are required to report your inheritance to the Belgian authorities within a certain timeframe, which is normally done via a Belgian notary.
In this context, Belgium knows an inheritance tax system rather than an estate taxation. Inheritance taxes are levied in the hands of the beneficiaries of the estate individually, rather than on the estate in its entirety. The UK Inheritance Tax, Canadian Estate Tax, US Federal Estate Tax and Australian Estate Duty & Death duty are all examples of estate taxes.
As assets are often subject to inheritance tax in the country where they are located, there is a risk for the beneficiaries of the estate of being taxed twice. We do have (inheritance) tax treaties with a few countries, but they are never actually used in practice. Irrespective of such inheritance tax treaty, the three regions do allow a tax credit for the inheritance tax paid abroad. However, such credit was initially only granted for tax that is levied on foreign real estate, not on movable assets abroad.
We mentioned last year that our Constitutional Court came to the conclusion that Belgian inheritance tax law is considered discriminatory for precisely this reason (Decision Nr. 80/2021, 3 June 2021). It allows a credit for foreign inheritance tax levied on real estate, but not for movable assets located abroad.
Shortly after this, the Flemish Tax Authorities issued a formal statement in which they agreed to adapt the Constitutional Court’s view. If the beneficiary can provide (i) a dated proof of payment of the inheritance tax abroad, and (ii) a copy of the filing and tax calculation certified by a competent foreign authority, the foreign inheritance taxes can be deducted from the tax due in Belgium.
If the foreign inheritance tax amount exceeds the Belgian tax, there is no additional tax due in Belgium.
Already for many years, the Federal Tax Authorities have taken the position that not only foreign inheritance taxes could be deducted (although limited to foreign real estate) from the Belgian tax due, but also foreign estate tax (Nr. E.E./80.587, 21 November 1968).
The Flemish Tax Authorities, on the other hand, initially took a more strict approach. Foreign inheritance tax could indeed be deducted from the Belgian tax due. However, foreign estate tax were only seen as a specific liability of the estate. They could only be deducted from the value of the foreign assets in order to determine the taxable base for Belgian tax purposes.
The above might sound like a mere academic issue, it has significant consequences for the Belgian inheritance tax calculation. The following example will illustrate this.
Let us assume that a non-US national owns a property in the US and is domiciled in Belgium at the moment of death. Real estate that non-Americans own at death is subject to US Federal Estate Tax. The first $60,000 of the real estate value is exempted. After that, the tax rate reaches 40% where the assets are valued over $1,000,000.
If the deceased owns a US property with a value of $1,500,000 and has one child who is the sole beneficiary to the estate, the US estate tax would amount to approx. $550,000. If the deceased lived in Flanders, the Flemish inheritance tax due on the property would amount to approx. €360,000.
In view of this, it is an important difference if the Belgian (regional) authorities allow you to deduct the US estate tax of $550,000 only from the taxable value of $1,500,000, or directly from the (Flemish) inheritance tax due. In the first scenario, the taxable base would be decreased to $950,000, which would still result in an inheritance tax due in Belgium of approx. €210,000. In the second case, the US estate tax would exceed the Flemish inheritance tax (40% in the US as opposed to 27% in Belgium), so there would be no additional tax due here.
After the intervention of the Constitutional Court last year, the Flemish tax authorities took the position that foreign estate taxes are also fully deductible from the tax due in Belgium. The term ‘inheritance tax’ is now interpreted in the broadest sense (i.e. any tax levied as a result of one’s death).
The Flemish approach is therefore aligned with the Federal viewpoint, both for movable goods and real estate. A distinction is no longer made between taxes levied in the hands of the beneficiaries of the estate individually, and taxes levied on the estate in its entirety. Any tax paid on assets located abroad, that exceeds the Belgian (regional) tax, results in no additional taxes due in Belgium.
While the Flemish tax authorities have adjusted their position already last year, we were still awaiting the Flemish legislator to confirm this as well. In October 2022, a bill of law was submitted, but it has not yet been approved.
It is positive to learn that it will apply to foreign inheritance tax levied in any country, and not only to those paid in the country where the assets are located. The fact that the Flemish legislator only includes foreign inheritance tax and not foreign estate tax, is a missed opportunity in our opinion.
In Wallonia, to our knowledge, no new legislation has been adapted yet.
In Brussels, the legislator has already intervened, but – unlike the Flemish Region – has limited the scope of the deduction to inheritance taxes levied in the country where the assets are located. Same as in Flanders, foreign estate taxes are not considered either. It should however be noted that in Brussels the Federal instruction (Nr. E.E./80.587, 21 November 1968) continues to apply.