Tax experts from Mazars Société d’Avocats (France) and CAZIMIR (Belgium) have analyzed the potential impacts of the changes of the new Treaty for their clients (wealthy individuals and owners of family businesses).
In this article, we will focus on the situation of individuals residing in Belgium who hold real estate property located in France. Please note that our contributions only look at the situation from the point of view of the specific changes introduced by the new Treaty. The national provisions have not been changed by this new Treaty, the French and Belgian applicable taxes thus remain fully applicable.
We are with Camille and Maxime. They go to France every summer holiday. Year after year, they discover a different French region and in 2018, they found heaven on earth in a cottage in the Loire region. They buy it and use it as a holiday home. The purchase was done directly, and not via a corporate structure such as a French SCI. They are wondering what would be the consequences if they rented out the property during the weeks they are not in France in light of the personal income tax.
Both Belgian and French national provisions state that the French rental income is within the scope of their respective tax laws. Hence, a double taxation conflict arises. Such conflict will be solved by the Treaty.
The new Treaty still provides that periodical income from French real estate is taxable in France.(1)
Rental income is thus subject to French income tax and, potentially, social security surcharges. The tax treatment will depend on the modality of the rent (furnished/unfurnished) and on the applicable French régime (e.g. régime réel d'imposition, régime micro-foncier or micro-BIC).
This also means that Belgium will have to exempt the income.(2) This will be done by applying the exemption with reservation of progression method. In short, the French income will be added to the
taxable base in Belgium to determine the applicable progression bracket. Once this has been done, the French income will be taken out of the taxable base and the determined percentage will be applied on Belgian (progressively taxed) income only.
As for the effective tax base to be used in this calculation (the “French income”), we refer to the recent change in Belgian law regarding the attribution of a “cadastral income” to foreign real estate. In the past, the law determined that the French rental income was used to calculate the effective tax base. As from income year 2021, the taxable base is equal to the indexed cadastral income, increased by 40%. The cadastral income is allocated by the administration (Department of Measurements and Valuations) following the declaration of the fair market value of the real estate done by the taxpayers.
As mentioned above, the treaty still reserves to France the power to levy taxes on 'income' from French real estate.
From a Belgian perspective, this also includes the personal use of the property. However, French national law does not determine a fictitious rental income if the owners use the property themselves. As a result, in France, Camille and Maxime remain untaxed for income tax purposes.
Remarkable is however that, according to the new Treaty, the Belgian State only has to exempt this income (with application of the exemption with reservation of progression method) if this income is effectively taxed in France. As mentioned, France does not levy any income tax under its domestic law when the taxpayer uses a French property for his own purposes and thus does not realise any income from it.
In such a case, the Belgian tax authorities could argue that, in principle, Belgium does not have to grant an exemption, in which case the “foreign” income would not only be retained to determine the applicable Belgian progressive tax rates, but would be fully included in the Belgian tax base. Arguably, a 50% tax relief is granted in this situation.
Regarding the calculation of the Belgian tax base, we refer to the first hypothesis (“indexed and increased cadastral income”).
(1) (Old / unchanged)) article 3 of the double taxation convention between Belgium and France states: “Income from immovable property, including accessories thereto, and the livestock and equipment of agricultural and forestry undertakings, shall be taxable only in the Contracting State in which the property is situated.” (New) article 6 of the double taxation convention between Belgium and France states: “Income derived by a resident of a Contracting State from immovable property situated in the other Contracting State (including income from agriculture or forestry) may be taxed in that other State.”
(2) (Old / unchanged) Article 19 of the Double Taxation Convention between Belgium and France: "Income other than that referred to in paragraph 1 above shall be exempt from the Belgian taxes referred to in Article 2(3)(A) of this Agreement if the taxation thereof is attributed exclusively to France. (…) Notwithstanding the above provisions, the Belgian taxes referred to in this Agreement may be calculated, on the income that is taxable in Belgium under this Agreement, at the rate corresponding to the aggregate of the incomes taxable under Belgian law.” (New) Article 22 of the DTC BE-FR "Where a resident of Belgium derives income, other than dividends, interest or royalties, or owns capital assets which, under the provisions of this Convention, are taxable in France (except to the extent that such provisions permit taxation by France solely because such income or capital assets are also income or capital assets derived by or owned by a resident of France), Belgium exempts this income or these assets from tax, but if this resident is an individual, Belgium exempts this income from tax only to the extent that it is effectively taxed in France."
Source : Cazimir