To stimulate a more active transfer of family businesses, the Flemish Government decided in 2012 to change fiscal tactics and provide for an exemption of donation tax and a reduced rate of 3% of inheritance taxes for spouses and cohabitants on the transfer of a family business. The inheritance tax rate equals 7% for all other persons.
Note that inheritance taxes are governed by the Regions. The Walloon and the Brussels Regions also have a tax beneficial regime for the transfer of family businesses, but it is important to remember that the rates and the conditions to benefit from the regimes are not identical.
In this note we will focus on the Flemish regime and some interesting evolutions in the way the rules are being interpreted.
The basic conditions to benefit from the beneficial Flemish tax regime on the transfer of shares of a family owned company are as follows:
1. The shares of the transferred company should be your or your family’s property for at least 50%. This percentage is reduced to 30% when you have, together with another shareholder 70% of the shares, or with two other shareholders 90%. In order to qualify as shares, voting rights are required. It is after all the purpose that control of the company is transferred.
2. Only companies creating economic value qualify. Having real economic activity is one of the conditions in order to benefit from this favourable tax regime. The Flemish tax authorities assess this based on the following accounting parameters, in particular if
(i) the company’s personnel costs are less than 1.5% of the balance sheet total and
(ii) its balance sheet item “land and buildings” would exceed 50% of the balance sheet total,
this company would not qualify for the favourable tax regime. The law does mention that it is possible to provide proof to the contrary that there is indeed a real economic activity. If both conditions are not cumulatively met (thus if one accounting parameter is met) and there is private real estate in the company, the Flemish Tax Authorities, as it also stated earlier in its circular 2015/2, will not allow evidence to the contrary.
3. Finally, these conditions should be continued for 3 years after the donation, i.e. the activity should be maintained, no capital decrease can be performed, the seat should not be transferred outside the EEA (European Economic Area).
Note that in a recent judgment of the court of first instance in Ghent of 4 February 2020, the judge has a different view on private real estate in order to benefit from the favourable regime. As mentioned, if one accounting parameter is met and there is private real estate in the company, the Flemish Tax Authorities, as it also stated earlier in its circular 2015/2, will not allow evidence to the contrary. The judge stated that the tax authorities do not correspond with the literal legal text of the Flemish Codex Taxation, which does not provide that evidence to the contrary would no longer be possible as soon as the company holds even one private real estate.
One could say that the Flemish Tax Authorities thus add conditions (read do not own any private real estate) that are not provided for in the law. It therefore goes beyond its competence. In this case, the court agreed with the taxpayer. However, we have been informed that an appeal is currently pending.
Therefore, it is very important to check whether the accounting parameters are met at the moment of donation and three years afterwards. Extra vigilance must therefore be exercised in the case of private real estate in the family company at the moment of the donation or in the three years following on this. We see that the Flemish Tax Authorities are clearly checking this and asking questions about this. Please note that in the case that a subsidiary is a family company, the accounting parameters should be checked based on consolidated figures.
If you need assistance in reviewing the qualification of a family company in order to benefit from the favourable regime and the continued respect of the conditions in the years after the donation, please contact your tax advisor or Philippe Vyncke or Julie Roovers in this regard.