In a previous Tax Topic we briefly discussed the legal consequences of the European Court of Justice’s decision in which the Belgian rules concerning the assessment of inheritance and transfer duties were considered to be incompatible with Articles 56 and 58 of the EC-Treaty (Case Nr. C-11/07, ECKELKAMP, dd. 10 March 2007).

Inheritance of foreigners temporarily employed in Belgium, who are treated as non-residents (e.g. under the special expatriate tax regime), are generally subject to inheritance tax only in respect of their real estate located in Belgium. In the latter situation, the inheritance tax due was originally based upon the gross value of the property. No deduction of debts (e.g. mortgage, etc.) was allowed under this regime.

As a result of the aforementioned «Eckelkamp-case», this legal restriction was abolished in 2009 by the Flemish and Walloon legislators. If the deceased is a non-resident at the time of death but living within the European Economic Area (EEA), the debts relating to the immovable property are now deductible.

However, it is the Dutch equivalent and its tax opportunities for Belgian residents we will hereafter focus on.

The Dutch equivalent in which the European Court of Justice took a similar view, is known as the «Arens-Sikken-case» (Case Nr. C-43/07, ARENS-SIKKEN, dd. 8 November 2008). As a result of this decision, the Dutch legislator abolished the inheritance tax for non-residents (the so-called «recht van overgang») as of 1 January 2010. For this the Dutch Inheritance Act of 1956 (the so-called «Nederlandse Successiewet 1956») was amended in December 2009.

Dutch holiday accommodation

As many Belgian residents have a holiday home somewhere in France or at one of the Spanish Costas, quite a few of them have a holiday retreat in The Netherlands. In case of death of the owner of such property, the question rises which country, Belgium or The Netherlands, is authorized to levy the inheritance tax on real estate property located in The Netherlands.

The recent amendment of the Dutch Inheritance Act creates new tax planning opportunities for all Belgian residents that have the Belgian or Dutch nationality.

First scenario: Belgian residency in combination with Belgian nationality

The first scenario is that of a Belgian resident who has the Belgian nationality and, at the time of his death, is the owner of Dutch (private) real estate property.

-   Belgian legislation

In Belgium, the inheritance tax is calculated on the basis of the value of the total estate, after deduction of debts (Article 1 Belgian Inheritance Tax Code - BITC). The tax base is thus the gross value of the estate, less any debts incurred by it, irrespective of where the assets are located (i.e. in Belgium or abroad)(Article 15 BITC).

It is clear that this system often results in a double taxation where part of the estate is located abroad. As inheritance taxes do not fall within the scope of the general double taxation agreements, a separate bilateral agreement is required. In view of this, Belgium only has such double inheritance tax agreements with France and Sweden (and they are not really operational).

Most countries levy an inheritance tax on the real estate located on their territory in the case of death of a non-resident and its transfer as a result of the owner’s passing away (i.e. principle of territoriality). This is thus contrary to the Belgian principle that imposes a tax on the total inheritance, irrespective of where it is located.

To avoid a double taxation, Article 17 BITC stipulates that the Belgian inheritance tax due can be decreased with the foreign inheritance tax levied in the country where the real estate is located. Evidently, proof op payment abroad will need to be provided.

-   Dutch legislation

The question rises whether the Dutch Tax Administration will levy an inheritance tax on the real estate located on their territory.

It is a general rule in the Netherlands that normally no transfer tax or inheritance tax is due on what a Dutch resident receives from a testator or a deceased living abroad at the time of his death. The essential criterion here is the place of residence of the deceased. The place of residence of the beneficiary is not relevant.

In the new Dutch Inheritance Act of 1956, this principle remains the same. However, two fictitious residency presumptions apply under which the deceased is still considered to be a Dutch resident although he is living abroad.

Before 1 January 2010 (and before the abolishing of the Dutch non-resident inheritance tax), an inheritance tax was due for the real estate located in The Netherlands that was, as part of an inheritance, transferred to one or more beneficiaries living abroad.

In the scenario that a Belgian resident with the Belgian nationality owns Dutch (private) real estate property, his heirs will have to pay the Belgian inheritance tax on the total value of the estate, including on the Dutch real estate. The Dutch non-resident inheritance tax is no longer due. As a result, there is no longer a risk for a double inheritance taxation.

Second scenario: Belgian residency in combination with Dutch nationality

Which country is authorized to levy an inheritance tax in case of death of a Belgian resident who is a Dutch national, no longer living in The Netherlands, but who is still the owner of Dutch (private) real estate ?

-      Belgian legislation

Also in this second scenario, the Belgian inheritance tax is due on the total value of the Belgian resident’s estate, irrespective of where it is located (i.e. in Belgium or abroad)(Article 1 and 15 BITC).

-      Dutch legislation

To know whether the Dutch inheritance tax will be due, we need to make a distinction between the Dutch nationals who left their country for more than 10 years and those who left The Netherlands less than 10 years.

·         Less than 10 years

Article 3, 1° DITC 1956, one of the fictitious residency presumptions, stipulates that a Dutch national who makes a donation or dies within a period of 10 years after he left The Netherlands, is considered to have made such a transfer as a Dutch resident. This presumption is thus applicable to all inheritances (inheritance tax) as well as to all donations (transfer tax).

The Dutch Inheritance Tax will be due on the total value of the estate (Article 1, 1° DITC 1956). However, the Dutch Inheritance Tax will be decreased with the inheritance tax due in the country of residence of the deceased (i.c. Belgium), on the condition that the estate was subject to a taxation similar as the Dutch Inheritance Tax (Article 48, 1° of the Dutch Decision on Double Taxation of 2001).

This reduction to avoid double taxation is not applicable to, for example, real estate located in The Netherlands. This implies that, if the inheritance of a Dutch national contains Dutch real estate property, the full (non-reduced) Dutch Inheritance Tax will be levied. However, in that case Article 17 of the Belgian Inheritance Tax Code can apply (Decision of 16 July 1990, Rep. R.J., Nrs. S17/06-02/91 754 and 91 757)(see above).

·         More than 10 years

Evidently, the Dutch Inheritance Tax is no longer due in case the Dutch national has left The Netherlands for more than 10 years and the residency presumption is thus no longer applicable. The total value of the estate will only be subject to the Belgian Inheritance Tax.

How to decrease the Belgian Inheritance Tax ?

In general, a decrease of Belgian inheritance taxes can be achieved by already donating the Dutch real estate to the beneficiaries (e.g. children) during the owner’s life (and thus not wait till he dies and let it become part of his inheritance). In that case the question rises what transfer duties will be due.

-      Donating the full and complete ownership

·         Belgian legislation

According to Article 159, 7° of the Belgian Transfer Tax Code, all agreements that aim to transfer real estate property located abroad from one owner to another, are subject to a fixed transfer tax rate of 25 EUR (and thus not to any proportional transfer duty).

This, however, would imply that a Belgian notary would be asked to register the transfer of real estate located in another country. As he is not familiar with foreign mortgage systems, it is very likely that he will not be eager to make such a registration.

·         Dutch legislation

Preliminary, it should be noted that in the Dutch tax system there is not only a tax on the donation of goods (i.e. a transfer tax or so-called «schenkbelasting»), but also a tax charged on the transfer as such of immovable goods (i.e. a conveyance tax or so-called «overdrachtsbelasting»).

Double taxation in case of a simultaneous levying of the transfer and the conveyance tax, was, until the recent introduction of the new Dutch Inheritance Act of 1956, eliminated by subjecting the donation only to the transfer tax (and not the conveyance tax).

As from 1 January 2010 (under the new legislation), the conveyance tax is nevertheless due, but can be deducted from the transfer tax due (new Article 24, 2° DITC 1956).

In The Netherlands, the transfer (donation) of Dutch real estate by a Belgian national or a Dutch national who has left The Netherlands for more than 10 years, will be subject to a 6 pct. conveyance tax. The Dutch real estate can be transferred without such transfer being subject to the transfer tax or the non-resident inheritance tax. If the Dutch national has left The Netherlands for less than 10 years, the transfer tax will nevertheless be due because of the aforementioned fictitious residency presumption.

Apart from this first presumption, there is an even stricter second presumption that stipulates that all transfers made by a Dutch resident (not national) within the year before this person left The Netherlands, will nevertheless be subject to the Dutch transfer tax (Article 3, 2° DITC 1956).

The nationality of the owner who transferred the real estate is of no importance. Every transfer made by a Dutch resident will then, irrespective if his nationality, be subject to the Dutch transfer tax due to this second fictitious residency presumption.

-      Donating the naked title to a property

·         Belgian legislation

According to Article 159, 7° of the Belgian Transfer Tax Code, all agreements that aim to transfer the naked title to real estate property located abroad from one owner to another, are subject to a fixed transfer tax rate of 25 EUR (and thus not to any proportional transfer duty).

·         Dutch legislation

In The Netherlands, the donation of bare ownership of Dutch real estate will be subject to a transfer tax or a 6 pct. conveyance tax on the value of the bare ownership (Article 21, 10° DITC 1956).

By transferring the ownership without usufruct, the beneficiary is deemed to become a full owner of the property at the time of death of the testator. This untaxed benefit is countered by Article 10 DITC 1956 that qualifies transferred goods (during the life of the deceased) as being a fictitious part of the inheritance. The transfer and/or conveyance tax paid before by the beneficiary will be taken into account by the Dutch Tax Administration, however the inheritance tax due will be calculated on the total value of the real estate property.

As from 1 January 2010, it has become even more tax disadvantageous to donate the bare ownership of Dutch real estate.

Before, the beneficiary was not required to pay an inheritance tax on the increased value of the real estate between the moment of transfer and the moment of death of the testator. Currently, the value increase during that period is taken into account as the inheritance tax due is based on the value of the real estate at the moment of death (Decision of the Secretary of Finance, dd. 16 December 2009, Nr. CPP2009/2357/M).

Before 1 January 2010, this Article 10 DITC 1956 would subject the inheritance of Dutch real estate by a resident living abroad to the Dutch non-resident inheritance tax. In the event that a foreign resident would first transfer the bare ownership of the Dutch real estate to his children (or to another beneficiary) and would then transfer the full ownership to them at the time of death when living abroad, the Dutch non-resident inheritance tax would be due.

In that case the transfer tax could be deducted from the Dutch non-resident inheritance tax due. This was similar in case the aforementioned usufruct structure was set up at the moment the testator was living in The Netherlands.

Since the amendment of the DITC 1956, the Dutch non-resident inheritance tax is no longer levied. Furthermore, in Belgium where the inheritance tax return will be filed, no inheritance tax will be due as the accrual of the usufruct to the bare property is not a taxable event.

Conclusion

If the testator is a Belgian resident with the Belgian nationality or with the Dutch nationality, but he has left The Netherlands for more than 10 years, the bare property will become a full and complete ownership for the heirs without any additional inheritance taxation.

Since 1 January 2010, the Dutch non-resident inheritance tax has been abolished. For Dutch nationals that have left The Netherlands less than 10 years, the situation remains the same as before.

For all other Belgian residents that own Dutch real estate, new tax opportunities arise. A donation of the real property will lead to an extensive tax saving, even for those testators that still want to keep the usufruct of it to themselves for as long as they are alive.