As already mentioned earlier in this newsletter, Belgians in general are very keen on owning real estate. This appetite for real estate shows an increasing trend considering the extremely low revenues, which can currently be earned with many financial investments. Apart from the family home, many of them decide to invest in a holiday home or in an investment property. Tax payers, who move to Belgium from abroad may also own real estate abroad.

Owning properties abroad has resulted in tax challenges as Belgian tax residents are required to report 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 actually 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).

This leads to the question on which amount must be reported in the Belgian income tax return. Although the question as such seems easy, the reply is quite complex and has been subject to numerous disputes with the tax authorities. After several court convictions, the Belgian tax authorities have (finally) issued a tax circular letter in order to comply with the growing case law.

For properties, located in Belgium, the following scenarios can occur:

1. the property is used as the main family residence of the tax payer or cannot be used as such due to social or professional reasons: no income is to be reported at all in the Belgian income tax return;
2. the property is kept for use by the tax payer (for example a holiday home): Belgian cadastral value (as defined by the tax authorities) must be reported;
3. the property is let out to a company, an organization or an individual, who uses the property for professional purposes (by taking a rental cost deduction in his tax return): the actual rent must be reported as well as the Belgian cadastral value of the premises
4. the property is let out to a private individual, who does not deduct rental expenses in his income tax return: the Belgian cadastral value of the premises must be reported.

A standard cost allowance of 40% is automatically applied on the gross taxable amount when the tax assessment is issued in Belgium so this deduction must not be requested on the tax form.

The Belgian income tax authorities in the past have applied a different regime for properties, located abroad. For properties outside Belgium, no (Belgian) cadastral revenue exists for the property and the tax payer had to come up with an appropriate estimate.

In case a foreign property was not let out, the authorities required that an estimated rental value was reported. 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. Any foreign income taxes, paid on the property can be deducted from the taxable amount.

This is a complex definition and it is quite obvious that the system of a fair estimate of the rental value of a property was unclear and therefore quickly led to discussions with the Belgian income tax authorities. More and more discussions were coming up on the estimation of the rental value of properties and many subsequent court cases were lost by the tax authorities as the Belgian tax rules were not compliant with European law (a different set of valuation rules was used for foreign properties as compared to properties, located in Belgium).

The Belgian tax authorities have issued a new tax circular on 29 June 2016 to try to resolve the discussions. One can note that it is quite unfortunate that the circular letter was only issued on 29 June, as the Belgian resident income tax returns on income year 2015 were due for filing by that date (or two weeks later in case of electronic tax filing). Tax payers could not use the new rules for filing their tax return and may have over reported foreign real estate income. They may still need to file a tax claim to ask a correction once the tax assessment is issued.

In the new tax circular, which is also applicable on pending discussions for past income years, the Belgian tax authorities accept the principle that the amount of actual or deemed real estate income, as defined by the competent foreign tax authorities is used as a basis the Belgian income tax return. The following situations are mentioned in the circular letter:

1. a deemed gross rent, which is taken into consideration for calculating the income taxes in the country where the property is located;
2. a deemed gross rent, used abroad for calculating taxes (for example a gross rent, based on a comparison with other properties);
3. the amount of taxable income, which is used as the basis for the calculation of the foreign income taxes.

The appropriate amount of income can be found on foreign tax documents, such as property tax documents, a foreign tax assessment etc….

In case the gross taxable amount abroad has been reduced by any cost or other deductions, based on the foreign legislation, these deductions must again be added to the amount in the Belgian income tax return. This is due to the fact that in Belgium a standard deduction of 40% (on the gross income) is always calculated and a double deduction is to be avoided. It may be quite difficult to identify the actual deductions in the foreign income tax return or on a foreign tax assessment document. This requirement to add deductible items is again a complexity and may unfortunately result in new discussions with the tax authorities