New double tax treaty between France and Belgium: nothing is set in stone for French real estate

The currently applicable double tax treaty between France and Belgium was concluded in 1964 and has been amended many times until 2009. After several years of negotiations, Belgium and France finally signed a new double tax treaty (hereafter, the “new Treaty”). The 1964 Treaty remains applicable until the new Treaty has been ratified by the French and Belgian parliaments. Assuming the ratification occurs in 2022, the new Treaty will be fully applicable from 1 January 2023.

Tax experts from Mazars in France and CAZIMIR in Belgium have analysed the potential impact of the tax changes in the new Treaty on individuals and owners of family businesses.

In this blog post, we focus on the situation of individuals residing in Belgium who hold real estate property located in France, looking specifically at the changes introduced by the new Treaty. National provisions have not been changed by this new Treaty, so additional French and Belgian taxes thus remain fully applicable.

We are with Belgian residents, Camille and Maxime. They go on holiday to France every summer. 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 personal income tax consequences if they rented out the property during the weeks they are not in France.

Situation 1: The cottage is rented out without any personal use by the owner

Both Belgian and French national legislation states that French rental income is within the scope of their respective tax laws. Hence, double taxation arises. Such a conflict will be solved by the new Treaty.

The new Treaty provides that any income from French real estate remains taxable only in France.^[1] Therefore, rental income is subject to French income tax and, potentially, social security surcharges. The tax treatment will depend on the rental arrangement (e.g. furnished or unfurnished) and on the applicable French regime (e.g. régime réel d’imposition, régime micro-foncier, or micro-BIC).

This means that, in this example, Belgium will have to exempt the income.^[2] This will be arranged by applying the exemption using the reservation of progression method. In short, the French income will be added to the taxable base in Belgium to determine the applicable income tax 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 to Belgian (progressively taxed) income only.

For the effective tax base to be used in this calculation (the “French income”), we refer to a recent change in Belgian law regarding the attribution of “cadastral income” to foreign real estate. In the past, the law determined that French rental income is used to calculate the effective tax base. From the 2021 income year, the taxable base is equal to the indexed cadastral income, increasing by 40%. The cadastral income is allocated by the administration (Department of Measurements and Valuations) following the declaration of a fair market value of the real estate provided by the taxpayer.

Situation 2: The cottage is not rented out

As detailed above, the new treaty still gives France the power to levy taxes on ‘income’ from French real estate. From a Belgian perspective, the Belgian Authority can assess deemed income from the personal use of the property by the owner. 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 on their own use of the property.

Interestingly, according to the new Treaty, Belgium only has to exempt this income (with the application for exemption made using the reservation of progression method) if the 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 their own purposes.

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 relating to own use would not only be retained to determine the applicable Belgian progressive tax rates but it would also 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, please refer to our comments on this in the first situation (“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.”