What is the Flemish favorable tax regime for family companies?
The Flemish favorable tax regime for family companies makes it possible to shares of the company at a reduced tariff to inherit (3% or 7% inheritance tax) or to gift (0% gift tax).
This measure is subject to a number of conditions, including the activity condition.
What is the activity condition?
The activity condition is dual:
- First, the company must have a certain trade activity have as their object.
(an industry, trade, craft or agricultural activity, or a liberal profession) - Second, the company must also practice that activity in reality.
There must be a so-called "real economic activity.
This includes:- Whether salaries, social charges and pensions (62 account) account for min. 1.50% of total assets.
- Whether the land and buildings (22- and 26-bill) account for max. 50% of total assets.
In other words, if the company has few or no employees and holds a lot of real estate (more than 50%), it is considered inactive.
This legal presumption is refutable. When both parameters are exceeded, the rebuttal still be provided to show that the company does engage in economic activity.
The activity condition and presence of real estate
The opinion of the Flemish Tax Administration
As for the rebuttal evidence to be provided, the Flemish Tax Administration (Vlabel) takes a very strict attitude to. Indeed, rebuttal evidence is not accepted as soon as the company owns one property that:
- Not or only partially used for economic activity.
- Externally leased becomes (either to private individuals or to professional persons outside the group).
Where the company primarily leases real estate, Vlabel held that real economic activity could only exist if the total real estate assets, consisting of business premises, leased exclusively within the corporate group (exclusive intra-group rental of commercial buildings).
Vlabel is knocked back by jurisdiction
Meanwhile, Vlabel has been knocked back several times by case law.
First there was the now famous butchery judgment. This involved a company that held and leased private and professional real estate, but also operated a farm butchery. In this case, the court concluded that privately rented property does not prevent the application of the tax favor system.
A more recent ruling has since clarified that even the leasing of commercial property to third parties (i.e., outside the corporate group) does not necessarily prevent real economic activity from occurring.
What was the case about?
The holding company in question owns two properties that are professionally leased.
One property is leased to a subsidiary, who uses it as an office and garage. The other property is leased to a third, which uses it as business premises for the sale, maintenance and repair of passenger cars and light commercial vehicles. Both premises are used for commercial purposes and generate structural annual income for the holding company (185,585 euros for the year 2019).
Because the rental of the one property out of group took place, Vlabel decided that the favorability regime could not be applied directly on the basis of the holding company's rental activities and thus should be limited to the value of the active subsidiary.
Verdict of the court of appeal of Ghent
The court reaffirms that real estate activities taken by themselves as a economic activity may be considered, when:
- These activities transcend the mere passive management of real estate (the simple acquisition and ownership of real estate)
- and add social value in a sustainable way generate.
In addition, the court of appeals affirmed that Vlabel unfairly only intragroup rental accepts as an economic activity and excludes external rentals (renting to third parties).
According to the court, by excluding external rentals, Vlabel wrongly adds an exclusivity condition to the law. However, the court does emphasize that external rentals are also must exceed mere passive management. This was the case in the case before us, as both properties were professionally leased for long periods of time.
Vlabel, meanwhile, acquiesced in the ruling.
Conclusion
The ruling of the Ghent Court of Appeals is a favorable development for family partnerships that lease real estate. The fact that property is also rented out to third parties does not mean that the favor system can no longer apply.
Nevertheless, some caution and nuance remains appropriate. The case involved commercially leased property, and not on private use. The appellate court expressly emphasized that the real estate located in the corporation was not private patrimony.
Do you have questions about this? Contact us, we are happy to help you!