Transfer of the family business: no private property?
July 2022 – In the Flemish Region there is a special tax regime applicable to the transfer of a company, either by donation or following a death. According to the tax authorities, this preferential regime is not applicable when there are also private assets in the company. But the Ghent Court of Appeal sees things differently.
Patrimonial company
In the Flemish Region, but also in the other Regions, there is a preferential regime applicable to the transfer inter vivos or on death of a family business. The rate applicable to the transfer by donation of a family business is 0% in the direct line, whereas the rate applicable to the transfer by inheritance of a family business is 3%. This preferential regime applies to both sole proprietorships and family-owned companies. In the latter case, the reduced rate therefore applies to shares or units transferred by gift or inheritance.
The preferential rates do not apply to private assets. In the case of a sole proprietorship, this means that the rates apply only to assets that were used for business purposes.
In the case of a company, this condition is formulated somewhat differently: an exemption or a reduced rate is only possible for a family company that carries out a real economic activity.
A company is presumed not to have any real economic activity if it is clear from the balance sheet that the following cumulative conditions have been met in at least one of the three financial years preceding the taxable event:
salaries, social security charges and pensions represent a percentage equal to or less than 1,50% of total assets; and
land and buildings represent more than 50% of total assets.
The law provides that the beneficiary - heir or donee - may provide evidence to the contrary, but Vlabel suggested in a 2015 circular that all real estate present in the company must be used for the company's economic activity.
Vlabel also clarified in that circular that the leasing of real estate is always considered a form of private asset management. In other words, if a company has a house in its assets and rents it out to private individuals, the company will automatically be excluded from the preferential regimes, as it will no longer be able to prove that there is a real economic activity.
Ghent Court of Appeal
The Ghent Court of Appeal was seized of a case in which a butcher's shop was operated as a company. The shares belonged partly to the joint estate of the father and mother and partly to the son. The father died and the heirs (mother and son) claimed the application of the preferential regime for family businesses.
Apart from the butcher's shop, the company owns a great deal of real estate: a showroom, a business, farmland and pastures, a wood, a farm, a villa, apartments by the sea, etc. The heirs prove that the income from the butcher shop is almost three times higher than the income from these properties. However, as stated above, the Flemish tax authorities take the view that as soon as there are private assets (including the rental of real estate) in the company, there is no real economic activity in the company, and evidence to the contrary cannot be provided.
However, the Court follows the reasoning of the heirs. Anyone who consults the law on this subject will see that the beneficiary always has the possibility of proving that there is a "real economic activity". The presence of private assets in the company is not disputed by anyone. The fact that renting out real estate is not considered an economic activity either is not disputed. The only point of disagreement between Vlabel and the heirs is whether or not proof to the contrary is admissible in this case.
Prorata
Finally, the Court asked the parties to consider whether the exclusion of the preferential regime should be limited to shares that relate to private assets, and thus whether the preferential regime should apply to the part of the estate that actually relates to the economic activity.
The Court rightly notes that, if this situation had arisen in a sole proprietorship, the reduced rate would have been applicable to the assets used for the economic activity (excluding real estate mainly used or intended for housing) and not to the other assets. Now that it is a question of the transfer by inheritance of the shares of a family company with a real economic activity, but also a considerable amount of land and buildings that are not used (or only partly used) for that economic activity, the preferential regime is totally excluded. The Court therefore asks the parties to consider whether to submit a preliminary question to the Constitutional Court.
Intervention of the legislator by decree
In the meantime, a proposal for a decree has already been submitted to the Flemish Parliament, which literally provides for the exclusion of companies from the preferential regime if the company has real estate that is mainly used or intended for private housing.
This would provide a legal basis for Vlabel's current position.
