Belgian inheritance tax discriminatory according to Constitutional Court
On 3 June 2021, the Constitutional Court ruled that Belgian inheritance tax law is discriminatory to the extent it allows a credit for foreign inheritance tax levied on foreign real estate, but not for movable assets located abroad (e.g. bank accounts, shares, artworks, etc.). This is obviously a landmark decision for the many foreigners who live in Belgium who often also own assets abroad.
When a Belgian resident dies, their worldwide assets are in principle subject to Belgian (regional) inheritance taxes. Both real estate and movable assets in Belgium and abroad are part of the estate of the deceased and are subject to Belgian inheritance tax. The beneficiaries of the estate, whether they live in Belgium are abroad, are liable for paying this tax.
In this respect, Belgium knows an inheritance tax system rather than an estate taxation. The latter is levied on the estate in its entirety and not in the hands of the beneficiaries of the estate individually.
As foreign real estate is often subject to inheritance tax in the country where it is located, the beneficiaries of the estate will often be taxed twice. To avoid this, Belgian tax law allows a credit for the foreign inheritance tax paid abroad. The total Belgian tax due can then be reduced with the foreign tax levied on the property.
However, such credit is only allowed for tax that is levied on foreign real property, not on movable assets abroad. Such assets will often also be subject to inheritance tax in the country where they are situated. In the absence of a credit, double taxation may arise, which has a significant impact on the estate of Belgian residents.
We do have inheritance tax treaties with France (1959) and Sweden (1956), but they are never actually used in practice. The treaty with Sweden has also become useless considering that since 2005 Sweden has abolished its inheritance and gift taxes. We also have an inheritance tax treaty with the US, signed already in 1954, which was never ratified by Belgium. As a result, domestic rules on the application of tax credits (or absence thereof) remain applicable.
We need to add to this that when foreign tax concerns an estate tax and not an inheritance tax, the Belgian authorities in principle already allow the deduction of the foreign tax paid to determine the taxable value of the movable asset for Belgian taxation purposes. This is because estate tax is considered a liability of the estate itself, and not of the individual heirs. This is, for example, the case for the UK Inheritance Tax, Canadian Estate Tax, US Federal Estate Tax and Australian Estate Duty & Death duty.
In its recent judgement, the Belgian Constitutional Court ruled that Belgian inheritance tax law is discriminatory as it allows a credit for foreign inheritance tax levied on real estate, but not for movable assets located outside Belgium.
The judgement concerned a lawsuit where the deceased died in Spain but was still considered a Belgian tax resident. In addition to the Belgian inheritance tax, the beneficiaries also paid Spanish inheritance tax, on both the Spanish real estate and the bank accounts. The Belgian authorities allowed a credit for the Spanish inheritance tax on the real estate but not for the taxes paid on the bank account balance.
The beneficiaries challenged the tax authorities’ decision on the grounds of a violation of the principle of equality and non-discrimination. While the Court of First Instance and Court of Appeal did not follow the heirs’ argumentation, the Supreme Court did present the matter to the Constitutional Court.
The Court concluded that the difference in tax treatment between real estate and movable assets cannot be justified by the objective of fighting tax avoidance. It is no longer reasonable for an heir of foreign movable assets to be treated differently compared to those who inherit foreign real estate.
Not only in this particular case the beneficiaries were consequently allowed a credit for the foreign tax paid; it could potentially also be extended to other taxpayers that have not been allowed a similar tax credit in the past. A refund claim would expire after 5 years (as from 1 January of the year in which the claim arises). In our opinion, we believe there is no statute of limitations yet for any inheritance taxes paid from 2017 until now.
Especially for the Flemish Region, the government has indicated that the relevant legislation is soon to be amended in accordance with the above decision of the Constitutional Court. The Brussels Capital and Walloon Region should normally follow soon as well with a similar legal initiative.
For international estate planning purposes, this in an important development. It will avoid the international estate of a deceased Belgian resident from now on being subject to a double taxation.