New tax rules in the making for foreign real estate
We have covered this topic already back in April 2018 and January 2019. On 12 November 2020, the European Court of Justice (ECJ) imposed a lump-sum fine of €2 million and a daily penalty of €7,500 for each day that Belgium continues to maintain a difference in tax treatment of rental income depending on whether the property is located in Belgium or abroad. In response to this, Belgium has now decided to change its tax regime for foreign real estate.
Currently, if an individual taxpayer owns a second property in Belgium, he will be taxed on the indexed cadastral income (revenu cadastral/kadastraal inkomen) increased with 40%, regardless of whether the property is rented out or not. The cadastral income represents the average (fictitious) annual rental value of the property. However, in practice, the cadastral income is still based on an index that goes back to 1975, subject to an annual indexation since 1991.
However, if a resident taxpayer owns a second property abroad, he needs to include in the Belgian tax return either the actual rental income (if rented out) or actual rental value of the property abroad (if not rented out), minus any foreign tax paid.
The Belgian tax authorities accepted before that homeowners could use the foreign equivalent of the Belgian cadastral income for some countries. This is the case for e.g. the Netherlands (waardering onroerende zaken or WOZ-waarde), France (base d’imposition), Spain (valor catastral) and Italy (rendita catastale). If the property is located in a country that has no equivalent to our cadastral income, some tax courts suggested in the past that 22.5% of the gross rental value could be declared instead.
It should be noted that foreign real estate income is in principle always ‘exempt with progression’ in Belgium based on the double tax treaty in place. The income itself will therefore not be taxed in Belgium but is nevertheless considered to determine the average tax rate that applies to your other taxable income in Belgium.
Given that the actual foreign rental value usually exceeds the cadastral income of a comparable Belgian property, the tax treatment of domestic and foreign real estate is deemed discriminatory. This unjustified unequal treatment was already addressed a couple of years back by the European Commission, but Belgium had failed to take any further action.
To remedy this, the Belgian Minister of Finance has recently proposed to allocate a (fictitious) cadastral income to each foreign property on the same basis as for a property located in Belgium. This concerns approx. 150.000 properties, the majority of which are in France, Spain, Italy and the Netherlands.
This new valuation method will be based on the normal market value of the property abroad on 1 January 1975. Let us assume we know the market value of a property in 2020, then a coefficient of 15.036% must be applied. That result is then multiplied by 5.3% to reduce the market value to a ‘rental value’ (which is believed to then reflect the cadastral income).
This 5.3% correction is the same for everyone (‘fixed’ ratio between market and rental value), the coefficient itself logically varies depending on the year. If you know the market value of 1975 (or before), then no correction is required (coefficient is always 1.000%). For the years after that, the relevant coefficient will be published every year by the Belgian tax authorities. For example: a coefficient of 14.622% is applied to a market value of 2015, a coefficient of 7.882% applies to a market value of 1999, etc.
It is important to note that this ‘foreign’ cadastral income will be considered a net income, therefore the taxpayer will no longer be able to deduct any foreign taxes from it.
The tax authorities aim to receive the information needed for this from Belgian taxpayers by March 2022, in order for properties to be declared in the June 2022 tax return (for income year 2021). Anyone who acquires a foreign property after 1 January 2021 will have 4 months’ time to complete the necessary reporting formalities. Anybody who owned the foreign property already before 31 December 2020, will have 12 months’ time to submit the relevant information to the tax office.
If the taxpayer does not know the market value of the property, they will have to state the purchase price and the purchase year, as well as the cost and date of any renovation works.
The tax authorities also want to introduce a specific administrative fine of minimum €250.00 and maximum €3,000.00 if homeowners would fail to comply with this reporting requirement.
This new method will normally apply as of income year 2021 (tax year 2022). Therefore, nothing will change for the past, up to and including income year 2020.
Belgian companies and Belgian branches of foreign companies that own foreign real estate will not be affected by this new legislation.
Update: we have recently learned that the above proposal has been sent back to the drawing table by the Minister of Finance, so the new valuation method will probably still be amended later on. We will keep you updated of any further developments.
Update: the Belgian legislator has approved this new law on 11 February 2021, which will come into effect as from income year 2021 (tax year 2022) onwards.