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DIRECT HOLDING OF REAL ESTATE
This section discusses the most important tax implications of the direct holding of real estate. First, it discusses the impact on resident individuals and non-resident individuals. Thereafter, it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal Income Tax
Under Belgian tax law, the tax treatment of rental income depends on the destination of the real estate: private habitation or professional purposes. Income from real estate is subject to personal income tax.
If the real estate is rented to individuals who use it for private habitation purposes, personal income tax will be calculated based on the cadastral income, indexed and increased by 40%.
If the real estate is rented to persons who use it for professional purposes (e.g. the premises is rented for business purposes) or is rented to companies, the taxable income will be calculated on the basis of the total amount of the rent and rental benefits, minus 40% for maintenance and repair costs (which a minimum threshold amounting to the cadastral income increased by 40%).
If the real estate is rented out to persons who use it partly for private purposes and partly for professional purposes and in the registered lease agreement a split-up is made between the use (percentage private vs. professional) and the price, then the individual will be taxed, for the professional part, as the real estate was used for professional purposes. For the private part, the individual will be taxed as the real estate was used for private habitation purposes. In case no split-up is made in the lease agreement, or in case no registered lease agreement is in place, the individual will be taxed as if the home would be used for professional purposes only.
Deductibility of Costs, Interest and Depreciation and lLnked Tax Reductions
If certain conditions are met, mortgage interest, as well as capital amortisations and mortgage protection insurance premiums resulting from a mortgage loan, are deductible for personal income tax purposes or give rise to a tax reduction. It should be noted though that these reductions are slowly being abolished and are no longer possible in many cases (especially in the Brussels Region and in the Flemish Region).
Real Estate Tax
Regions levy an annual real estate tax on real estate located in Belgium.
The annual real estate tax levied annually by the regions by way of assessment is due in the hands of the owner, usufructuary or beneficiary of other rights in rem.
The real estate tax is based on a percentage of the indexed cadastral income. The applicable percentage depends on the region in which the real estate is located (1.25% in Walloon and Brussels regions and 3.97% in the Flemish region).
Besides the regional real estate tax, significant additional local taxes are levied by provinces and municipalities.
Various reduced rates and exemptions can apply depending on the region in which the real estate is located.
Non-resident individuals
Taxation and benefits linked to real estate can vary depending on the status of the individual.
Resident companies
If certain conditions are met and depending on the status and the Belgian location of the individual, there is also the possibility to declare the mortgage loans (amortisations, interests and protection insurance premiums resulting from mortgage loans) related to a real estate in Belgium, provided that conditions are fulfilled to do so. As for the resident individuals, these reductions are slowly being abolished and are no longer possible in many cases (especially if the individual is living in the Brussels Region and in the Flemish Region).
Corporate Income Tax
Income derived from leased real estate is subject to corporate income tax at a rate of 25% as of 1 January 2020. A tax rate of 20% may apply to the extent that certain conditions are met.
Deductibility of Costs, Interest and Depreciation
The company’s income can be reduced by business expenses in connection with the real estate (e.g., interest expenses on loans, annual depreciations, repairs, maintenance, annual real estate tax, losses). As a general rule, regional taxes are non-deductible for tax purposes.
The annual depreciation is calculated based upon the useful economic life of the real estate. The following standard straight-line depreciation rates are generally accepted by the Belgian tax authorities: office buildings 3% and industrial buildings 5%.
With respect to interest, Belgian tax law contains specific deduction limitation rules, including the so-called “thin capitalisation rules” under which interest expenses are not tax deductible to the extent that a 5/1 debt-to-equity ratio is exceeded (i.e., the total of the interest-bearing loan is higher than five times the sum of the taxable reserves at the beginning of the taxable period plus the paid-up capital at the end of the same taxable period). This rule applies in respect of interest payments made to
(1) beneficial owners which are either not subject to income tax or that are subject to income tax on this interest income but under a considerably more advantageous regime than the Belgian common tax regime but also to intra-group loans
(2) beneficial owners that are part of the same group.
Anti-Tax Avoidance Directive
Since 1 January 2019, a new interest deduction limitation rule is applicable in Belgium and is the result of the implementation of the Article 4 of the Anti-Tax Avoidance Directive I (Council Directive (EU) 2016/1164 of 12 July 2016). According to the new limitation rule, the tax deductibility of exceeding borrowing costs is limited to the higher amount of €3.000.000 or 30% of the tax-adjusted EBITDA. The exceeding borrowing costs in relation with a loan concluded before 17 June 2016 and for which no fundamental modification was provided, are not affected by the new regime and are still subject to the Thin Cap rules, same as interest payments to tax havens.
Losses – Carry Back/Forward
In principle, Belgian resident companies can carry forward (tax) losses to offset the taxable base of their future income without time limitation. Since 1 January 2018, deduction of losses carried forward is limited to an amount of €1 million plus 70% of the portion of income exceeding that €1 million. As a result, the remaining 30% constitutes a minimum taxable base.
Restrictions of the tax deduction of losses carried forward also apply to the extent that a change in control of the targeted company does not respond to the legitimate needs of a financial or economic nature.
Non-resident companies
A foreign company that holds Belgian real estate is taxed on the net profit generated by that Belgian real estate. Income derived from the lease of Belgian real estate is subject to non-resident corporate income tax regardless of the presence of a permanent establishment of that company in Belgium.
INDIRECT HOLDING OF REAL ESTATE
This section discusses the most important tax implications of the indirect (shares) holding of real estate. First, it discusses the impact for resident individuals and non-resident individuals. Thereafter, it discusses the impact for resident companies and non-resident companies.
Resident individuals
Personal income tax
Dividends distributed by a Belgian company to its shareholders are subject to the sole and definitive 30% dividend withholding tax (with an exemption of the first EUR 800,00). Note that specific withholding tax exemptions and/or reductions based on domestic law may apply provided that certain conditions are met. Limitations can also apply based on double tax treaties.
Dividends distributed by a foreign company to a Belgian resident are also subject to taxation at a rate of 30% (or a lower rate - provided that Belgium has right of taxation based on the double tax treaties) but after the deduction of the potential foreign taxes already paid on them. The taxation of 30% (or lower rate) applies thus on the so-called “net border income”. Specific rules apply if the dividend is from a French source (application of the lump-sum foreign tax – but intended to be abolished when the new double taxation treaty between Belgium and France will enter into force).
Non-resident individuals
Non-resident individuals are in general treated in the same manner as resident individuals for dividends distributed by a Belgian company
Dividends distributed by a foreign company to a non-resident individual are not taxable in Belgium but in the country where the individual is a resident (if such a taxation exists). Non-resident individuals can however mention in the Belgian non-resident tax return (if they need to fill in such a tax return), the withholding taxes actually levied by the company allocating the dividend.
However, one should always be careful with the presence of specific rules within double tax treaties, and the status of the individual.
Resident companies
Corporate Income Tax
As a general rule, a Belgian resident company is liable to corporate income tax on its total worldwide income, including income derived from a shareholding.
Deductibility of Costs, Interest Payments and Depreciation
The company’s income can be reduced by business expenses in connection to the shareholding. Generally, shares are not depreciable. A write-off on shares is not tax-deductible.
Anti-Tax Avoidance Directive
Since 1 January 2019, a new interest deduction limitation rule is applicable in Belgium and is the result of the implementation of Article 4 of the Anti-Tax Avoidance Directive I (Council Directive (EU) 2016/1164 of 12 July 2016).
According to the new limitation rule, the tax deductibility of exceeding borrowing costs is limited to the higher amount of €3.000.000 or 30% of the tax-adjusted EBITDA.
The exceeding borrowing costs in relation with a loan concluded before 17 June 2016 and for which no fundamental modification was provided, are not affected by the new regime and are still subject to the Thin Cap rules, same as interest payments to tax havens.
Distribution of income and gains
Dividends paid to another Belgian company can benefit from the Belgian participation exemption regime provided that the following conditions are cumulatively met:
- Taxation condition: the dividend must have been subject to tax at the level of the distributing company;
- Holding condition: the shares have been held or will be held in the distributing company in full ownership during an uninterrupted period of at least one year;
- Participation condition: a minimum holding of 10% in the subsidiary’s capital or an acquisition value of €2,500,000.
To the extent that these conditions are met, dividends will be 100% tax-exempt in the hands of the beneficiary company.
Non-resident companies
Non-resident companies are treated in the same manner as resident companies to the extent that the shareholding has been assigned to the permanent establishment of the foreign company.
