On 28 June 2017, the Liège Court of Appeal (Hof van Beroep Luik/Cour d’Appel Liège) rendered its decision in X v. the Belgian tax administration (Case 2010/RG/887). The case concerned the taxable base of rented out real estate located in an EU Member State and the calculation method used by the Belgian tax administration for the exemption with progression clause of article 155 of the Belgian income Tax Code 1992 (BITC 1992) and article 23, §2, 1° of the Belgium – Luxembourg Income and Capital Tax Treaty (1970) (as amended through 2009) (the Treaty). Details of the decision are summarized below.
(a) Facts. A Belgian resident taxpayer obtained rental income for an apartment located in Luxembourg, leased to an individual not using it for a professional activity, and remuneration related to work physically performed in Luxembourg. The taxable base of the rented out apartment was based on the actual rental income obtained by the taxpayer. The income was exempt in Belgium under the Treaty.
As always, the tax administration calculated the income tax on all the (taxable and exempt) income, determining the average tax rate on the (taxable and exempt) income. Thereafter, it applied a deduction equal to the average tax rate over the exempt income.
The taxpayer disagreed with the taxable base of the apartment, referring to the decision of the European Court of Justice of 11 September 2014 (Verest & Gerards) stating that the use of an actual rental value is an unjustified restriction because Belgian real estate rented to individuals is taxed on a cadastral value which substantially deviated from the actual rental value.
The taxpayer also disagreed with the calculation method used to exempt the income because, as a result thereof, part of personal deductions, allowances and credits, applied in the first step, were allocated to the exempt income and thus not used. He argued that this method was contrary to the wordings of article 155 BITC 1992, article 23, §2, 1° of the Treaty, the Constitutional right of equal treatment and the free movement of workers and capital within the European Union.
(b) Issue. The issues were what the taxable base should be of rented out real estate located in another EU Member State and whether the exemption method requires that personal deductions, allowances and credits are solely to be imputed on the Belgian taxable income.
(c) Legal background. Income from real estate located abroad has to be taken into account when calculating the tax due on the other taxable income of the taxpayer. The BITC 1992 distinguishes between:
- real estate located in Belgium or abroad;
- real estate which is rented out or which is not rented out; and
- real estate which is rented out for professional activities.
For rented out foreign real estate, the taxpayer has to report the gross rental income received less taxes paid abroad. In respect of unrented real estate, the taxpayer has to report an assumed “rental value”. This value is equal to the average gross annual rent that could have been obtained if it would have been rented out reduced by the tax paid abroad.
However, for real estate located in Belgium, the taxable income is, generally, calculated by means of the Belgium cadastral value. Generally, the actual gross rental income received has to be reported only for professionally used real estate. In all cases, the income is reduced with a lump-sum deduction of 40% for maintenance and repair expenses (article 13 of the BITC 1992).
In the above mentioned decision the European Court of Justice held that a unjustifiable restriction of the EU freedom of capital exists because foreign immovable property, that is not rented out, results in a higher tax burden than immovable property situated in Belgium, whereas the situation of taxpayers who have acquired immovable property in Belgium is comparable with taxpayers who have acquired such property in another EU Member State.
Article 23, §1, 1° of the Treaty states the following: “income from Luxembourg [………] and items of capital situated in Luxembourg, which may be taxed in that State in accordance with the foregoing Articles, are exempt from tax in Belgium. This exemption does not prevent Belgium from taking into account the income and capital thus exempted for the determination of the rates of tax”. Article 155 BITC 1992 contains a similar provision.
(d) Decision. As far as the first question is concerned, the Court ruled that there is no significant difference between rented or unrented foreign real estate. The same argumentation as in the Verest & Gerard decision applies. The actual rental income cannot be used to determine the taxable base of real estate located in another EU Member State which is rented out to an individual not using it for a professional activity.
From a practical point of view the Court agrees with the proposal of the taxpayer to us 22,5% of the gross rental income as the taxable base. This percentage is mentioned by the European Commission in its press release of 22 March 2012. It refers to the cadastral value of Belgian real estate compared to its actual rental value (IP/12/282).
However, as far as the second question is concerned, the Court ascertains that both the BITC 1992 and the Treaty do not determine the manner in which the exemption method should be calculated. It refers to paragraphs 32 and 43 of the OECD Commentary, stating that this is purely a matter of national law. Moreover, according to the Court, the wordings of these provisions clearly indicate that while determining the income tax one must take into account the personal deductions, allowances and credits. The fact that for certain types of income (pension) another calculation method is used does not render article 155 BITC 1992 unconstitutional.
In respect of the free movement and capital argument of the taxpayer, the Court refers among others to article 24, §4 of the Treaty and the fact that the taxpayer has requested Luxembourg to take his personal status and total income into account. The EU provisions on the free movement of capital and workers have, according to the Court, certainly not the purpose to allow a taxpayer to claim personal allowances twice.