New rules on the transfer of a family business in Flanders:
View this page in Dutch
On January 1, 2012 the Flemish Parliament has introduced a new legislation which includes an important reform of the registration and inheritance tax duties on the transfer of family owned businesses. Some aspects of this new legislation have been clarified in a recent administrative circular letter issued by the tax authorities.
In the old provisions of the Flemisch Inheritance Tax Code, the transfer of family owned businesses and companies was exempted of inheritance tax if some conditions were met. The registration tax duties for the donation of shares of a family owned business were limited to a flat rate of 2% under certain conditions.
The new tax measures (article 140bis Registration Tax Code and article 60/1 and further of the Inheritance Tax Code) provide in an exemption of registration tax on the donation of shares of a family businesses if certain conditions are met. The inheritance tax exemption has been abolished and replaced by a reduced inheritance tax rate of 3% (for the spouse, legal cohabitant and direct ascendant or descendant of the deceased) and 7% (in all other cases) instead of the normal progressive inheritance tax rates that can go up to 65%. Both the exemption of registration tax as the beneficial inheritance tax rates are subject to the same conditions.
The incentive of the Flemish Parliament is to stimulate an earlier and more active transfer of family businesses and companies. The Government deliberately makes no distinction between a donation to a relative or a donation to anyone else. An important fact is that the Parliament even explicitly foresees the possibility to merely donate the bare property of the shares of a family business which enables the donator to remain in control of the family business (voting rights) and to remain entitled to its distributed profits.
The parliament is however aware that in some circumstances, it is rather unusual to donate the shares to a successor (e.g. young entrepreneurs). The beneficial inheritance tax rates should provide shelter in those cases. The new legislation is not only applicable to family businesses that are performed through companies, but also to family business that are not performed through a company. In the rest of the text, we will focus on the first category, given its relevance to our practice.
The conditions for the application of the exemption on registration tax or the beneficial inheritance tax rates are briefly the following:
A “family company” is a company that has his actual management inside the EEA and whose purpose is to exercise an “industrial, commercial, craft or agricultural” activity or a “liberal profession”. To determine the presence of the required activity, the first important parameter is the statutory objective of the company. Secondly, it will be important to demonstrate that this statutory objective is effectively exercised by the company. In most cases this parameter will be proven by the yearly accounts of the company, in which the personnel costs and revenues are included.
A company qualifies as a “family company” if the donor (and his family) holds at least the full ownership of 50% of the shares in the company. An exception to the participation condition is made for companies held by two or three different families. In those cases, the donor or deceased (himself or together with his family) needs to hold the full ownership of at least 30% of the shares. This exception is only applicable if 70% of the shares (if two entrepreneurial families hold the majority of the shares) or 90% of the shares (if three entrepreneurial families hold the majority of the shares) is owned by the entrepreneurial families together.
The Flemish Government explicitly wanted to limit the application of the registration tax exemption or beneficial inheritance tax rate for companies that provide an added value to the Flemish economy or the economy of the EEA. To avoid that companies that merely posses private property could qualify, the legislator foresaw a double standard that disqualifies companies from the new rule.
As such, companies that meet both the following two standards are disqualified from the new rule:
- The amount of money that is annually spent on wages, social charges and pensions is lower or equal to 1,5% of the total assets of the company;
- The value of the buildings and land, owned by the company exceeds 50% of the totals assets of the company. However, even if both standards are met, the tax payer has the possibility to prove that it really concerns a family company that performs a business which provides an added value to the economy.
Given that holding companies may often not meet to the activity condition as set out above, the legislator foresaw a specific exception for holding structures. When working with a holding company, the new rule only applies when the holding company directly holds at least 30% of the shares of at least one subsidiary which is situated within the EEA and which performs a real economic activity.
When it concerns a passive holding company that meets the exception and qualifies, the value on which the registration tax exemption or beneficial inheritance tax rate is applicable is limited to the value of the shares of all the active (grand)daughter companies situated within the EEA. As such, the value of the reserves or any other assets present in the top placed passive holding company will not benefit from the new rule. However, if it is possible to prove that the holding company performs an economic activity (e.g. intra-group activities such as bookkeeping, IT, IP, etc.) and doesn’t meet the two abovementioned disqualifying standards, it will be the total value of this holding company that will be taken into account for the application of the new rules, without analyzing the underlying companies.
Until now, the Flemish Government considered that management companies would automatically be excluded of the application of the favor settlement. However, in the new circular letter, they inform us that supporting activities can also be taken into account as being economic activities. If the tax administration will accept companies with real management activities as being companies with an economic activity is not clarified. Our opinion is that this is a grey zone and that each case should be estimated separately taking into account the activities provided by the management company and the activities of the underlying companies.
Only the shares that represent a part of the capital and which have voting rights will qualify for the exemption of registration tax or the reduced inheritance tax rates. Contrary to the former legislation, the new rule will no longer be applicable on debt-claims by the family on their family company.
In the new circular letter, the tax authorities again confirm that for entities such as a civil partnership (“maatschap”), the registration tax exemption or beneficial inheritance tax rate is also applicable.
After the acquisition (by donation or by decease) of the shares of the family company, some conditions should be met to be able to keep the advantages of the new rule. The family business or company must continue its activity without interruption for a period of at least three years after the donation or the decease. It’s not obliged to keep the same activity, but there is only an obligation to have an uninterrupted activity within the company for three years. This does not mean that the company cannot be sold during this three year period. As long as the activity is continued (even by a third person), no harm is done. During this period of three years, any capital decrease that is performed, will also be taxed at the registration or inheritance tax rates that would have applied if the new rule wouldn’t have applied.
The new circular letter clearly mentions that only for donations registered by an authentic deed, the donation will be tax free. Any other sort of donation (e.g. a manual donation), that later on is confirmed by an authentic deed is not accepted. Only authentic deeds (with a Belgian or foreign notary) will be valid for the exemption of registration tax.
Please not e that in the past, registration tax on the donation of shares in a company was often avoided by performing the donation in front of a foreign (e.g Dutch) notary public. The only risk that had to be taken into account was that the donation would still be subject to inheritance tax if the donor would die within a “suspicious” period of three years. Given that the risk of death within three years could in most cases easily be covered with a life insurance policy, this seemed like a valid solution. The new legislation changed this so-called suspicious period. As from January 1, 2012, the transfer of family businesses and companies is subject to a seven years “suspicious period” for the levying of inheritance tax, which makes it a lot more expensive to cover the risk with a life insurance policy.
In the previous Circular letter was clearly recorded that not only the qualifying companies were subject to this new “suspicious period” of seven years, but also those companies that were explicitly disqualified due to the two abovementioned double standard.
In the new Circular letter this double standard is not longer mentioned. It is not clear that a company which cannot benefit from the exemption of registration because of the fact that it is not considered as a company with a real economic activity, should fall under normal the suspicious period of 3 years. We will to bring more clarity soon.
For donations that have been done before January 1, 2012, the “suspicious period” remains 3 years.
The Personal Tax Services Team will keep you informed of the further decisions taken by the Flemish Government, as we are awaiting the new circular letter.