Transferring a family business
in the age of the coronavirus
February 2022 – When transferring a family business, you can avoid inheritance or gift tax if a number of conditions are met. One of these conditions is that the business must continue without interruption, which was not evident during the coronavirus crisis. Can you expect any help from the Minister?
Exempt transfer of a family business
A donation of a business is in principle subject to gift tax. Similarly, if a company is part of an estate, inheritance tax is payable in principle. This gift or inheritance tax can be significant and could force the donee or heir to dispose of the business in order to pay the tax.
To avoid this, the three Regions have introduced a special regime for companies, both in terms of gift tax and inheritance tax. In the Flemish Region, there is an exemption from gift tax in the event of the donation of family businesses and if the business is not donated, but the company director dies, a reduced rate of inheritance tax applies.
Exemption from gift tax
In order to benefit from the gift tax exemption, a number of conditions must be met at the time of the donation. The exemption is thus only intended for family businesses or family companies. A family business is a business that is personally operated by the donor or his or her spouse or cohabiting partner, whether or not jointly with others. A family company is a company owned by the donor and his family.
The exemption applies only to property used for business purposes. A home will always be excluded from the exemption.
In the case of a company, the donor must hold freehold shares which either represent at least 50% of the voting rights in the company or represent at least 30% of the voting rights in the company provided, in the latter case, that the donor holds freehold shares jointly with another shareholder which represent 70% of the voting rights in the company, or that he holds freehold shares jointly with two other shareholders which represent 90% of the voting rights in the company.
Asset companies and companies with no real activity are excluded. A company is considered to have no real economic activity if wages, social security charges and pensions (code 62 in the profit and loss account) represent a maximum of 1.5% of total assets (code 20/58 in the balance sheet) and if land and buildings (code 22 in the balance sheet) represent more than 50% of total assets (code 20/58 in the balance sheet).
But there are also a series of conditions to be met for a period of three years after the donation, namely
the activity must be continued without interruption ;
the buildings of the company that have been transferred at the reduced rate may not be used or intended mainly for housing;
in the case of a company, the company may not be a company without real economic activity and its equity may not decrease due to distributions or repayments.
Inheritance tax
There is no exemption from inheritance tax, but a reduction. The rate is 3% if the heir is a direct relative or partner of the deceased. In all other cases, the net value of the acquisition is taxed at 7%.
The conditions at the time of death are practically the same as for the exemption from gift tax. And as for gift tax, a series of conditions must be met for a period of three years after the death. These conditions are the same as for gift tax.
Covid-19
The coronavirus crisis has had an impact on the activities of almost all companies. Some entrepreneurs have been forced to effectively shut down their businesses for some time. Others have had to let go of some of their staff (whether or not they have been put on economic unemployment).
A cessation of activities, even temporarily, hinders the uninterrupted continuation of the same or a similar economic activity. This could therefore mean the loss of entitlement to the preferential scheme.
Similarly, there is a risk that a company that separates from its staff will become a company without any real economic activity. In addition to land and buildings, which may not represent more than 50% of total assets, salaries, social security contributions and pensions may not be less than 1.5% of total assets. It is therefore possible that this last condition of wage costs is no longer met. It should be borne in mind that the wage burden condition is also checked at the time of donation or death, so that there may also be a problem at that time.
The Flemish Minister of Finance, Matthias Diependaele, was asked about this in the Flemish Parliament. The minister replied that the continuity condition could not be a problem. Even in the event of a temporary closure, whether compulsory or voluntary, a company continues to exist without interruption, it keeps its company number, its website remains active, the corona aid it receives is included in its accounts, etc.
With regard to the condition of wage costs, the Minister points out that there is a double condition for a company without real economic activity: land and buildings may not represent more than 50% of total assets and wage costs may not be less than or equal to 1.5% of total assets. If land and buildings represent less than 50% of assets, reduced wage costs are no longer a problem.
There can only be a problem if both conditions are met, but even then you have the possibility, according to the minister, to prove that the company's buildings are used for business purposes and are therefore not private assets in a company. In this case, there will be a real economic activity.
You can also invoke force majeure.
The same reasoning applies to company directors who plan to donate their company in the future, but who, at the time of the donation, do not meet the condition of salary charges because of the coronavirus. And if both exclusion conditions are met, the company director can still prove that the buildings in the company are not private property and that they are useful to the company.
