Various options are available, although lower taxes on foreign properties would also eliminate the problem. Whatever the case may be, action is needed.
Cadastral income as a basis in Belgium
In Belgium, anyone who owns a second property or rents out a private property pays tax on the basis of the property’s cadastral income, i.e. on a fictitious rental income. This is generally significantly lower than the actual rental income received. Most EU countries do not use this kind of fictitious rental income and tax the actual rental income of a property. Belgium is the odd one out. Within a European context, this is not a problem as such; it is part of the fiscal sovereignty of member states.
Foreign property taxed differently
The problem lies in the different treatment of property located abroad, which in principle is exempt from Belgian personal income tax. After all, it is the countries where the property is located that are entitled to tax rental income. However, Belgium applies what is referred to as ‘maintenance of progressivity', which means that it takes foreign rental income (among other things) into account to determine the tax rate for other taxable income in Belgium.
Because foreign property within the EU usually does not have a fictitious rental income, foreign property income for the purposes of maintenance of progressivity is estimated on the basis of the actual rental income or rental value of the property, which as mentioned above is often higher than the fictitious cadastral income.
Court rejects higher tax burden
Consequently, a foreign property investment indirectly results in a higher tax burden than an equivalent investment in Belgium. This clearly contravenes European rules concerning free movement of capital, which stipulate that Belgium must not discourage investment in another European member state by means of less favourable (fiscal) rules.
The European Court of Justice has already ruled against Belgium twice. In 2014 for foreign property not rented out, and again in 2018 for foreign property that is rented out. Six years after this first ruling, Belgium still has not amended its legislation. Reason enough for the Court to order Belgium to pay the sum of €2 million and a daily penalty of €7,500 until the legislation has been amended.
Time for action
Despite this sanction, the question remains as to how Belgium will remedy the difference in treatment. In response to the conviction, the Minister of Finance has indicated that he will look for a solution but does not want to touch the tax on rental income for the time being.
A system in which foreign property is also allocated a similarly determined fictitious rental income could offer a solution, although the practical implementation would be quite a challenge. Another possibility would be the complete elimination of the maintenance of progressivity principle. Or should the sacred cow of taxation on second properties be comprehensively reviewed? It is as yet still all up in the air, but no doubt there will be more to follow.
Would you like to know more about foreign property ownership? Read about Belgians and their foreign property here.
Do you have further questions or would you like advice? Feel free to contact our experts.
