“Long-lease and lease-back” transactions: a powerful tool to boost your cash position, if tax leakage can be minimised


Introduction (at a glance) 

Within the domain of corporate finance, the concepts of “sale and lease-back” and “long-lease and lease-back” refer to a transaction whereby the owner sells, alternatively confers a long lease right on a fixed asset and leases it back from the buyer to regain the utilisation of the asset at hand. Such transactions positively impact a company’s cash position, ensuring sufficient liquidity to reinvest in their core business operations, enabling higher returns to drive growth. We’ve seen an increase in long-lease and lease-back transactions. These transactions are particularly interesting given that the generally accepted tax treatment thereof allows to minimise the cash-out at the moment of concluding the operation with the bank / investor. 

Tax costs of a long-lease and lease-back transaction

Upon conclusion of such a financial transaction, it is key to minimise tax leakage. Indeed, the goal of the transaction is to generate as much cash as possible to finance operations, acquisitions, etc.

If structured incorrectly, such transaction can trigger important tax costs, including (i) 12/12.5% registration duties on the market value/sales price of the real estate, (ii) an immediate cash-out of 25% corporate income tax on the capital gain and (iii) a potential VAT revision of previously deducted VAT on the construction / renovation.

If structured properly, the tax costs can be reduced significantly:

(i) First of all, on long-lease transactions (which is a right in rem on a fixed asset which grants the full use of the fixed asset for a maximum period of 99 years), the registration duties amount to 5% (recently increased from 2%) on the price for the long-lease increased with any future long-lease payments. This is, despite the increase, still significantly less than 12%/12.5%.

(ii) Secondly, from an accounting perspective, under certain conditions, there will be no immediate recognition of capital gains, but the gain should be spread over the depreciation period of the asset. The Belgian ruling commission has confirmed that this treatment should also be followed for corporate income tax purposes, allowing to defer the impact of a one-shot taxation.

(iii) Based on recent case law (so-called Mydibel case), VAT revision could be avoided. Indeed, the CJEU considered the sale and lease back operation a purely financial transaction due to multiple elements amongst other the fact that the building kept being used in an uninterrupted and durable manner before and after the transactions. For this reason, no VAT revision was applied. Note that administration interprets this exception cautiously, often rejecting cases that do not meet the exact conditions, such as when it does not concern a lease but another right in rem or when it concerns a sale and leaseback to a different taxable person. Appropriate structuring is key.

In summary, long-lease and lease-back operations can be a vital financing tool for companies. When appropriately structured, the cash generation upon conclusion of the contract can be optimised. PwC can of course support you in making the best decisions in this regard. 

Please reach out to Grégory Jurion or Kristof Vandepoorte for more information.