Cadastral income for properties located outside of Belgium
In light of a recent conviction by the European Court of Justice, the Belgian parliament adopted legislation on 17 February 2021 that aims to put an end to the difference in taxation of income from real estate located in Belgium and income from real estate located abroad.
In order to ensure an equal treatment, the Belgian tax authorities will allocate a cadastral income (similar to real estate located in Belgium) to each foreign property owned by Belgian resident taxpayers as from 2021. To give some more guidance to the taxpayer on this new legislation, a circular letter has been published on 1 March 2021 by the Belgian tax authorities.
What is going on?
Belgian tax residents have to report their worldwide income in the annual Belgian income tax return which also includes income derived from real estate outside Belgium. The amount of real estate income that should be reported in the income tax return differs depending on the use of the property (professional or personal) and its location (Belgium or abroad). Real estate situated in Belgium for personal use or for private rental purposes is taxed on the basis of the “cadastral income” of the property. The cadastral income represents the average (fictitious) rental value of the real estate in 1975 which is determined by the Belgian tax authorities. To determine the annual taxable value the cadastral income is indexed on an annual basis.
Contrary to the situation for real estate located in Belgium, the taxable value of the real estate situated outside of Belgium is determined on the basis of the actual rental income or in the absence of it, the rental value of the property. The rental value of a property corresponds to the annual rent which the taxpayer would have received in case the property was rented out (instead of the fictitious rental value).
In 2014 and 2018 the European Commission already ruled that the different methods of calculating the taxable income of immovable income depending on whether the real estate is located in Belgium or in another country of the European Union resulted in an unequal tax treatment. Furthermore the European commission stated that the rental value of real estate situated abroad is overvalued in relation to real estate situated in Belgium, which may discourage Belgian tax residents from making investments in real estate abroad.
Taking into account the above, the European Commission ruled that the Belgian national legislation was not in line with EU law, as it constituted a restriction of the free movement of capital. Belgium was referred to the Court of Justice of the European Union for its failure to implement a new regulation in order to end the restriction of the free movement of capital. Eventually, the European Court of Justice imposed a lump-sum fine of 2 million EUR and a daily penalty of 7,500 EUR for each day that that the difference in tax treatment was maintained.
In order to ensure an equal treatment going forward the authorities had two possible solutions, (i) either the government could choose to tax Belgian real estate on the basis of the rental income / value (i.e. adjustment of the taxation to that for foreign properties) or (ii) to allocate a cadastral income to the real estate located outside of Belgium, just as they do for real estate located in Belgium (i.e. adjustment of the taxation for real estate located in Belgium). Since the valuation of the Belgian real estate on the basis of the actual rental income / value would result in a higher tax burden the government opted to allocate a cadastral income to each foreign property owned by Belgian resident taxpayers.
The cadastral income will be determined on the basis of the current market value of the property.
Note that from a Belgian personal income tax perspective, the foreign properties will most likely be located in a State with which Belgium has concluded a treaty for the avoidance of double taxation. Consequently, the declared foreign real estate income will not be effectively subject to taxation in Belgium, however it will be taken into account to determine the tax rate applicable to other sources of income of the Belgian resident taxpayer (i.e. exemption with reservation of progression).
What should you do in case you own or acquire a foreign property?
As from 1 January 2021 each taxpayer who acquires or transfers a property located abroad will have to file a spontaneous declaration within a period of four months. This declaration can be done via MyMinfin as from June 2021. It is also possible to request a declaration form by email ([email protected]) or by letter (Administration of Measurements and Valuations, Koning Albert II laan 33, bus 55 in 1030 Brussels).
In this declaration the following information will have to be provided to the tax authorities with:
- A brief description of the property;
- The location of the property (i.e. address, country and any other relevant information);
- The current sales value for constructed property or the surface area in case it concerns a building/farm land;
- In case the current sales value is not available the taxpayer needs to provide the following information:
- The acquisition price;
- Year of acquisition;
- The cost of renovation works performed after the acquisition.
Based on the above mentioned information the tax authorities will determine and allocate a cadastral value to the foreign property and will inform the Belgian resident taxpayer accordingly.
A taxpayer who already owned one or more foreign properties before 1 January 2021, has until 31 December 2021 to declare these foreign properties to the Administration of Measurements and Assessments. The tax authorities will in principle reach out to everyone who has already declared income of real estate abroad in the tax returns for the assessment year 2020 and/or 2021. However, we would recommend that if taxpayers did not receive a request from the tax authorities they file a spontaneous and timely declaration.
Furthermore, it is important to note that as for real estate located in Belgium, also for foreign real estate any change will have to be spontaneously reported to the tax authorities (e.g. construction work done to the property).
Finally, the new legislation also includes a significant increase in the existing administrative fines. In case a taxpayer does not spontaneously provide the tax authorities with the necessary information regarding a new acquisition or disposal of property outside of Belgium they risk an administrative fine of minimum 250 EUR and maximum 3,000 EUR.
The Belgian tax authorities hope to receive all the information by the end of this year so they can allocate a cadastral income by the beginning of 2022. The cadastral income for foreign properties will have to be reported for the first time in the personal income tax return with respect to income year 2021, which will have to be filed by mid-2022. The old rules remain thus applicable for the income tax return with respect to income year 2020.
In case you would like to receive some more information or in case you would need any assistance to fulfil these new requirements, please do not hesitate to contact us.
Amelia De Grave