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French holiday home is no longer taxed on the actual rental value
 
Since the decision of the European Court of Justice, we know that there is a problem with the Belgian rules on the taxation of foreign holiday homes. But the European Court did not say what the new rules had to be; the Antwerp Court of Appeal now gives an interesting answer.

The owner of a Belgian holiday home is taxed on the cadastral revenue increased by 40% and corrected for inflation. That is the general rule for any property that is not the taxpayer's own home, or that is not rented out to someone who uses it for his professional activity. For a second residence abroad, however, different principles apply. For overseas properties, the taxpayer pays tax on the actual rental income when they are let out, or, if they are not let out, on the estimated rental income (the "rental value").

The cadastral revenue is a fixed value which is deemed to reflect the actual rental value in the seventies and which, despite indexation, usually has little to do with the actual rental value today. In most cases, it makes a great difference whether tax is paid on the cadastral revenue (even increased by 40% and adjusted for inflation) or on the actual rental income or rental value.

Higher tax for overseas home infringes the European rules

A taxpayer with a French holiday saw this as an infringement of the European rules. The tax authorities estimated the rental value of his holiday home at €16,000, while according to Belgian standards the cadastral income would perhaps be only 1,000. He thought that the much higher tax discourage people from purchasing a second residence in another EU Member State. He put his case to the European Court of Justice and the Court agreed with him (Decision of 11 September  2014, Verelst & Gerards).

However, in practice we could not do much with that decision. To start with, the Court stated that we need to check case by case whether the tax will be higher. Moreover, the Court does not say which tax regime we should apply. Simply applying the Belgian rules for a second home in  Belgium  is not possible since the Belgian authorities do not set a cadastral revenue for overseas properties.

France also has a kind of cadastral revenue

However, the tax authorities immediately showed some understanding for the taxpayer who had brought his case before the Court of Justice. Not only did the tax authorities admit that the criterion of the actual rental value would effectively result in a higher taxation in comparison with Belgian properties, but it even proposed an alternative.

For France that is fairly simple, because France has something that is comparable with the Belgian cadastral revenue ; that is not the case with most other countries. It is the "valeur locative". This too is a fixed rental value that is supposed to reflect the situation in the seventies. The only difference is is that the "valeur locative" shows a gross rental value, while the Belgian cadastral revenue represents a net amount. However, the tax administration said, that should not be a problem, we can just deduct a fixed percentage for expenses of 40%. That is applied by default for Belgian properties on which tax is paid on the actual rental income. And then we multiply it by 1.4 to stay according to the standard rules a second residence in Belgium.

In the end, Court of Appeal of Antwerp had to cut the knot. The taxpayer defended another solution  that was even more advantageous for him. He thought that he should be taxed on the French "valeur locative" minus the real estate taxes already paid in France (the "taxe foncière" and the "taxe d'habitation"). He had found that method in an internal instruction issued by the tax authorities a few years ago. In that instruction, the tax administration suggests that such a calculation method is acceptable, if only for the sake of simplicity.

Discussion settled through internal instruction

In the eyes of the Antwerp Court that was the end of it. The tax authorities just have to apply their own internal instructions. Based on the principles of good governance, the tax authorities did not really have a choice, at least not in France.

Finally, just to be clear: in most cases, Belgian tax is not effectively due on the actual income or on the deemed rental income from a foreign holiday home. It is the country where the property is located that may tax such income, and in Belgium, the income is exempted. However, the overseas income or deemed income is taken into account when calculating the tax on other income that is taxable in Belgium (that is "exemption with progression"). Because the rates are progressive, a higher rate is applied as the income goes up. That means that taking account of the (untaxed) overseas rental income will lead to a higher tax on other income that is taxed.  This decision just means that there will be just not that much higher tax.

Source: judgment of the Court of Appeal of Antwerp on 2 June 2015




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