Already in 2007, the EC pointed out that an incompatibility arises from the different methods of calculating taxable income depending on whether the real estate is located in Belgium or in another EU country.
In the latter case, as part of the taxation of Belgian residents’ income, such foreign real estate income is treated disadvantageously in comparison with income relating to real estate located in Belgium. According to the EC that difference in treatment is liable to restrict the free movement of capital as it discourages people from investing their money in immovable property in the EU.
In a recent decision (C-110/17 of 12 April 2018), the European Court of Justice again confirmed the unequal tax treatment of Belgian and European real estate. It is not the first time that Belgium has been convicted in this matter (C-489/13 of 11 September 2014). Belgium is now liable for penalties if it does not adjust its domestic tax rules.
Taxation of real estate
In Belgium, income from real estate not rented out or property rented out to private individuals who do not use them for professional purposes, is determined on a flat-rate basis. While for other EU property it is calculated on the basis of the actual rental value or the actual rental income earned.
The flat rate that applies to Belgian real estate is formed by the ‘cadastral value’, which was determined on 1 January 1975 from an estimate of the net normal rental value determined on the basis of the rent which, should that property be rented out, could have been collected on that date.
It is common ground that, since 1991, the cadastral value of real estate in Belgium has been adjusted by an increase coefficient, the rate of which changes every year according to the consumer price index.
The ‘cadastral value’ is a Belgian concept and is obviously not applicable to real estate located in another Member State of the EU or of the EEA. To the extent that foreign tax administrations do not conduct any assessment of income from immovable property that is not rented out, estimating the rental value of such property thus falls to the taxpayer.
For EU property, the taxable amount is thus calculated based on the rental income received or on the actual rental value of the property.
In both cases, the value obtained is reduced, first, by the taxes paid to the country on whose territory the property is located and, second, maintenance and repair costs estimated on a flat-rate basis.
When Belgian tax residents own a second property in Belgium, they need to declare the ‘cadastral income’ in their tax return. If those same Belgians have a second residence outside Belgium, they must include the actual rental income received or rental value.
The latter often results in a higher taxable basis. The cadastral value of real estate located in Belgium is, in spite of its indexation and adjustments, still lower than the actual rental value of that property and the actual rent. The ECJ has now confirmed that this higher taxable basis for second properties in the EU is in violation of European law.
Double tax treaty
It is a fact that income from immovable property located in another country is only taxed in Belgium in the absence of a double tax treaty with the country on whose territory the real estate is situated. Income relating to that property is subject to a taxation in Belgium, while benefiting from a 50% rebate.
However, if a double tax treaty is in place, the right to tax is always with the country in which the property is located.
This foreign rental income is then taken into account for the purpose of applying the ‘rule of progressivity’ when calculating the amount of tax on the taxpayer’s remaining income taxable in Belgium. In this case, the overvaluation of income from property situated in a Member State of the EU or the EEA other than Belgium, may lead to the application of a more onerous tax rate.
Belgium must now change its legislation to address the unequal treatment and to avoid facing penalties. It is obviously not clear how this will be done and what will be the impact.
The current under-taxation of Belgian real estate could, for example, be remedied by determining the taxable base of Belgian property on the basis of the actual rental income or rental value and no longer the ‘cadastral income’. However, this is politically very difficult, as a sudden tax increase on real estate could result into public unrest.
It is therefore up to the government now to find a suitable solution for this.