The Council of Ministers approved on 11 December 2020 a preliminary draft law amending the Belgian income tax code with regards to income from real estate located abroad. In the following lines, we will explain what this change could entail for you.
Belgian tax residents who own real estate in Belgium or abroad are required to declare the income thereof in their annual Belgian income tax returns. Most of the time, the foreign real estate is located in a State with which Belgium has entered into a treaty for the avoidance of double taxation and the declared foreign immovable income is not effectively subject to tax in Belgium. It is however taken into account in order to determine the Belgian tax rates applicable to the tax payer’s other sources of income and which are subject to the general progressive tax rates.
The amount of immovable income to declare varies depending on the use of the property (professional or private use) and its location (in Belgium or abroad). When the property is intended for personal use or for private rental purposes, residents with immovable property in Belgium must declare (and are effectively taxed on the basis of) the property’s (low) cadastral income, while residents with property located abroad must declare the property’s real rental income or, in the absence of rental income, the property’s real rental value.
The Court of Justice of the European Union ruled, in both 2014 (for non-rented real estate) and 2018 (for real estate rented to individuals), that this difference in tax treatment violates the principle of free movement of capital. Belgium was fined with two million euros together with a periodic penalty for failing to implement the CJEU’s caselaw which prompted Belgium to review its tax legislation.
It was therefore necessary to find a solution to calculate the tax on immovable property located in Belgium and abroad according to similar standards. The government had the choice between taxing owners of real estate in Belgium on the basis of their actual rental income (as is currently the case for immovable property located abroad) or taxing owners of real estate located abroad on the basis of their cadastral income (as is currently the case for immovable property located in Belgium). For fear that real estate investments would no longer be attractive and/or that the additional tax burden would have to be borne by tenants, the government opted for the second solution.
This second option means in concrete terms that the tax authorities will have to allocate a cadastral income to foreign properties owned by Belgian residents, just as they do for real estate located in Belgium. In order to do so, the tax authorities propose a method of calculation based on the current market value of the property: they would first correct the current market value by applying a correction factor to it which will have to be determined annually (15,036% for income year 2020). They would then apply a percentage to the result to obtain the property’s annual rental value. This annual return is estimated at 5,3%. The cadastral income of a flat on the French Riviera with a current market value of € 600.000 would therefore be equal to € 600.000 x 15,036% x 5,3% or € 4.781,45.
It will be up to each taxpayer to inform the tax authorities of the existence and, probably also, the value of the immovable property he or she owns abroad. To this end, the draft law requires taxpayers to declare any acquisition (purchase) or transfer (sale, gift, etc.) of real estate located abroad to the General administration for patrimonial documentation. This declaration will have to be made within four months of the acquisition or the transfer.
Acquisitions and transfers are not the only circumstances that will give rise to this obligation. Taxpayers who already owned one or more immovable properties abroad on 31 December 2020 will also be required to declare these to the tax authorities. They will have until 31 December 2021 to do so. Consequently, Belgian taxpayers who have declared foreign immovable income in previous tax returns will receive a letter from the tax authorities in the course of 2021 inviting them to declare their foreign real estate on the basis of a questionnaire.
According to the draft law, those who fail to comply with their reporting obligation are liable to a fine, the minimum of which is fixed at € 250 and the maximum at € 3.000. The fines applicable to those who failed to comply with their reporting obligations with the cadastre ranged from € 50 to €1.250. There is therefore a general increase in the applicable penalties as of 1 January 2021.
These penalties will not only be applicable to owners of foreign real estate but also more generally to any person who, for instance, accomplishes construction work in Belgium or who, for another reason, has to file a declaration with the General administration for patrimonial documentation and fails to do so.
If you have declared income from a foreign immovable good in previous income tax returns, you can expect a letter from the tax authorities in the course of 2021 asking you to complete a questionnaire. If you’ve acquired or transferred foreign real estate in the course of 2021, you will also have to declare this acquisition or transfer within the aforementioned deadlines to avoid the application of penalties. We will, of course, be pleased to assist you if you so require.
Please note that the preliminary draft law which was approved by the Council of Ministers is currently under review by the State Council (“Conseil d’Etat” – “Raad van State”). The law has therefore not yet been adopted by the Parliament. We will keep you informed of any evolution of the situation and, in the meantime, you can already reach out to us if you have any questions.