A new law passed on 11 February 2021 assigns cadastral income to property abroad. Moreover, a circular was published in which the tax authorities explain their interpretation of this law and provide some practical examples. What does this mean in practice?
Exemption on income from property abroad with maintenance of progressivity
If you, as a Belgian, own property abroad, then you will in principle enjoy a tax exemption on the income from this property for the purposes of your Belgian personal income tax return. However, the rental value is taken into account to determine the personal income tax rate, which means that your other taxable income in Belgium is subject to a higher rate. In technical jargon it is referred to as 'exemption from income on property abroad with maintenance of progressivity'.
No more discrimination
Until recently, the rental value of your property abroad was determined on the basis of the actual rental value. However, Belgium was reprimanded for this approach by the European Court of Justice,which ruled that the fact that Belgians who rent out Belgian property to persons who do not use it for professional purposes are taxed on the basis of the CI (cadastral income) (multiplied by 1.4) is discriminatory. Whereas the income of compatriots who rent out properties abroad is determined on the basis of the actual rental income, minus foreign taxes and a 40% flat-rate deduction for expenses.
A change in the law was necessary. Henceforth, the new law will assign a cadastral income (CI) to property abroad and this CI will serve as the basis for an exemption with maintenance of progressivity.
New CI makes significant difference
The following example illustrates the difference between the actual rental value and the new CI.
Suppose a Belgian resident has a second home in France that they use themselves and don’t rent out. The actual rental value of the property amounts to 12,000 euro. The French tax imposed on the second home is 700 euro. The CI for this second residence amounts to 1,500 euro.
Under the old scheme: actual rental value
- 11,300 euro needed to be declared on the Belgian personal income tax return, i.e. the rental value minus foreign taxes.
- The calculation programme then automatically applied a 40% cost deduction.
- Taxable base: 11,300 euro - 4,520 euro = 6,780 euro
After the change in legislation: CI
- 1,500 euro needs to be declared on the Belgian personal income tax return. The CI is a net amount, i.e. no foreign property tax is deducted.
- The taxable income is determined as follows:
Indexed base: 1,500 euro x 1.8630 (income year 2021) = 2,794.50 euro
Taxable base: 2,794.50 euro x 1.4 = 3,912.30 euro
The rate which applies to the non-exempt income (the above-mentioned maintenance of progressivity) is determined on the basis of this taxable base. Under the new regulation, this amounts to 3,912.30 euro instead of 6,780 euro - a significant difference.
Points of specific interest
- The new CI applies to already constructed property that is not rented out, such as a second home, or that is rented out to a natural person who does not use it for professional purposes.
- When renting out to companies, or a natural person who uses the property for professional purposes, the actual rental income remains taxable, less the foreign tax and fixed costs (40%). These costs are limited in line with the newly attributed CI, similar to Belgian properties. The indexed CI multiplied by 1.4 will also count as minimum taxable income.
- Moreover, a CI is only relevant for personal income tax purposes. In corporate taxation it is not used to determine the taxable base, i.e. no CI is determined for Belgian companies that own property abroad.
How is the CI determined?
The CI is determined in much the same way as for Belgian property. Until recently, the tax authorities used three different methods. For property abroad, a fourth method was added.
1. The CI is determined on the basis of the rental value of the property in question on 1 January 1975.
2. The CI is determined by comparing with similar properties. This is the most commonly used method for property for which there are many benchmarking points.
3. The CI is based on the market value of the property at the reference time (1975) to which a rate of 5.3% is applied. This method is used when there are no benchmarking points as is the case for industrial plants and extraordinary goods.
4. If it is not possible to determine a CI on the basis of the three methods mentioned above, the historical value may be approximated by applying an actualisation or correction factor to the current normal market value. This actualisation factor is published annually in the Belgian Official Gazette and is determined on the basis of the interest rate for 10-year linear bonds as published by the National Bank of Belgium.
For the year 2020 this factor should be equal to 15.036. To determine the actualisation factor for 2021, the 15.036 factor is multiplied by the average interest rate for 10-year linear bonds for the year 2020, increased by 1.
If the current market value of the property is not known either, the purchase price can be used, providing the acquisition took place under normal circumstances and no major work has been carried out on the property since then. The correction factor for the year of acquisition is then applied.
Example of current market value
Suppose a Belgian resident buys a second home in Spain for 500,000 euro (current market value). The historical rental value or market value are not known, nor are there any useful benchmarking points.
To determine the historical value, the correction factor (still to be specifically determined for 2021) will be applied to 500,000 euro. To subsequently determine the CI, the 'corrected' amount will be multiplied by 5.3%:
- 500,000 euro / 15.036 x 5.3% = 1,762.44 euro
- The CI for the second home in Spain amounts to 1,762.44 euro
Example purchase price
If only the purchase price is known, e.g. 300,000 euro in 2011, the calculation is as follows:
- 300,000 euro / 13.124 x 5.3% = 1,211.52 euro
- The CI for the second home in Spain amounts to 1,211.52 euro
Example involving a new building on an existing site
The same principles apply when a new building is erected on an existing site. Suppose a plot of land was purchased in 2011 for 100,000 euro and a dwelling to a value of 250,000 euro was subsequently erected in 2020.
- Land: 100,000 euro / 13.124 x 5.3% = 403.84 euro
- Building: 250,000 euro / 15.036 x 5.3% = 881.22 euro
- The CI for this property amounts to 1,285.06 euro
Mandatory declaration of property ownership abroad
As an owner of property abroad, you must automatically declare this property to the Belgian tax authorities (Administratie Opmetingen en Waarderingen - Land Registry and Mapping Agency; the former Land Registry). If you already owned property abroad (before 1 January 2021), you will have to submit a declaration by 31 December 2021 atthe latest. The transfer or acquisition of a property abroad must also automatically be declared within a period of 4 months.
The declaration must include the following information:
- A brief description of the property
- Location (address and country)
- The normal market value. Or failing that, the purchase price and the year of acquisition, as well as the cost of any work carried out and the year in which it was completed.
The Land Registry and Mapping Agency will draw up a list of taxpayers who have declared property abroad in their last declaration and will contact them to collect the necessary data. The declaration obligation will take effect as soon as the property abroad is occupied.
Delayed declaration of a property abroad may result in an administrative fine of between 250 and 3,000 euro.
Once the CI has been determined by the Administration, the taxpayer will be notified accordingly. It is anticipated that these notifications will be submitted no later than 1 March 2022 (with effect from 1 January 2021). The new CI will also be available via MyMinfin.
When will the legislation take effect?
The change in legislation will take effect from 1 January 2021 (calendar year 2021 - tax year 2022). The CI for your foreign income shall consequently have to be declared for the first time in the 2022 personal income tax return.
Do you have further questions concerning this matter? Our expert, Dimitri Lemaire, will be happy to provide additional information. Please do not hesitate to contact him.
Would you like to know more about property taxation? Download the e-book 'Wegwijs in de vastgoedfiscaliteit' (Property Taxation Guide)free of charge here or register for the property taxation webinar on Tuesday 30 March 2021, which will cover 4 recent developments in property taxation.