Belgians in general are very keen on owning real estate. Apart from the purchase of a family home, many of them also invest in a holiday home and a substantial number of properties is purchased outside Belgium, where more sunshine is available to make their holidays even more enjoyable.
Together with the holiday home, new tax challenges will also come up. Belgian tax residents are indeed required to include world wide income in their Belgian annual income tax return. This includes income, derived from real estate outside Belgium.
In case the property is located in a country, with which Belgium has signed a tax treaty (which most often is the case), the related income will not be taxed in Belgium. Most tax treaties will allocate the taxation rights to the country, in which the property is located. Nevertheless the income is to be reported in the tax return, and will be included in the calculation of the progressive tax rate, which is applicable on regular Belgian income (principle of exemption with progression).
The question then arises on the amount to be reported in the Belgian income tax return. Although the question as such is easy, the reply is quite complex. In case the property is let out, one has to indicate the net rent received (after deduction of the foreign tax on this income).
If the property is not let out, an estimated rental value is to be reported. For properties in Belgium, the estimated rental value is easy to determine as this is the so-called cadastral revenue, which is defined by the Belgian tax authorities for each property. No cadastral revenue exists, however, for properties outside Belgium and the tax payer will need to come up with an appropriate estimate. The rental value of a property is defined as the annual average rent, which one would be able to earn from the property during the year, in case it would have been let out, based on the customs of the country and the location of the property.
This is a complex definition and it is quite obvious that the system of a fair estimate of the rental value of a property is unclear and is likely to give rise to discussions with the Belgian income tax authorities. In the past, discussions were rare, as most Belgians simply ‘forgot’ to report their foreign homes in their Belgian income tax return. These days, however, have long passed by and consequently more and more discussions are coming up on the estimation of the rental value of properties.
This was recently the case for the owner of a holiday home in France, which was not let out. The tax payer had, as is often done by many persons, used the French valuation rules (“valeur locative”) as a basis for fling his Belgian income tax return. This resulted in an amount of 780 EUR to be reported.
The Belgian tax authorities did not agree with this valuation. They even came up with their own comparison with another property in the same area, which was let out. On this basis, they increased the rental value to 7.000 EUR (a staggering 9 times higher than the fair estimate by the tax payer).
The case was brought before the Antwerp courts and the Court of Appeal indicated that the French system of determining a rental value (valeur locative) bears a resemblance with the Belgian system of the cadastral revenues. In addition, the court draws attention to the fact that also in Belgium, the cadastral revenue tends to be lower as compared to the actual rent, which can be earned, though the difference in Belgium (between cadastral value and actual rent) is smaller in Belgium than in France.
The Court, however, could not yet come to a conclusion on the case because the difference between the valuation rules for Belgian properties (on the cadastral revenue) as compared to the fair rental value for foreign properties, possibly results in a restriction of the free movement of capital within the EU. This difference could create a barrier for Belgian residents to invest abroad. A prejudicial question was raised with the European Court of Justice to further decide on this matter.
In case the free movement of capital is affected by the current rules, this would then result in the need for the Belgian government to change the Belgian tax rules, relating to the taxation of real estate. One can only have the fear that this will yet again fuel the trend for radical tax increases, such as we have seen during the past 3 years in Belgium. Especially any form of income, which surpasses a basic employment income, is targeted and investments in a secondary home are deemed to be excessive signs of welfare and risk to become more (tax) expensive in the future in Belgium.