Split purchase of property and Belgian inheritance tax
The Belgian tax administration tones down its position
In our previous Tax Alert, we informed you of the decision made by the Belgian tax authorities in April 2013 (Decision dated 19 April 2013 – EE/98.937) to levy inheritance tax on the full property of all assets acquired by the deceased for the usufruct and by a third party for the bare ownership, even if the bare owner could demonstrate that the bare ownership had been financed with his/her own funds, when these funds had been donated by the deceased to the bare owner prior to the acquisition.
The decision of the tax administration was based on a new interpretation of the initial preparatory works of the law having introduced the disposition currently known as article 9 Inheritance Tax Code (IHTC), in 1919.
According to article 9 IHTC, inheritance tax is due on the full property of all assets bought by the deceased for the usufruct and by a third party for the bare ownership, when it cannot be demonstrated that the acquisition itself did not mask any gift from the deceased to the bare owner.
It is widely accepted that the presumption of gift established by article 9 IHTC can be reversed by demonstrating that the bare owner already owned the funds used for the financing of the bare ownership prior to the split purchase.
The Courts of law, initially followed by the tax administration, generally consider that the presumption of article 9 IHTC is still reversed when it appears that the bare owner received the funds by donation from the usufructuary prior to the split purchase. Indeed, the fact that the split purchase has been preceded by a donation of funds by the deceased to the bare owner does not mean that the split purchase itself would mask any gift in favor of the bare owner.
The tax administration, however, changed its mind and now considers, since April 2013, that a donation by the usufructuary to the bare owner of the funds used for the financing of the bare ownership confirms the presumption of gift established by article 9 IHTC.
The new standpoint defended by the tax authorities has been strongly criticized by the major part of the authors for the reason that it adds new conditions to article 9 IHTC, in contravention of the general principle that a text of tax law must be subject to a restrictive interpretation. After having been questioned several times on the subject in the Federal Parliament, the Minister of Finance has been forced to admit that his administration should go back to the drawing board.
Consequently, the tax authorities have recently published a new decision (decision EE/98.937 dated 18 July 2013), which replaces the decision of 19 April 2013.
Unfortunately, it appears that the new decision dated 18 July 2013 is only a toned-down version of the removed decision of 19 April 2013 : the tax administration is indeed standing by the questionable point of view that a donation of funds made by the usufructuary to the bare owner prior to the split purchase does not reverse but confirms the presumption of gift established by article 9 IHTC. However, the tax authorities will admit to exclude the application of article 9 IHTC if at least one of the following conditions is met:
the donation of funds has been subject to the Belgian gift tax;
the beneficiary of the donation was able to use the funds as one pleases, which should be the case, according to the tax authorities, if it can be demonstrated that the donation was not specifically intended to finance the acquisition of the bare ownership by the beneficiary.
The tax authorities’ new standpoint is applicable to all transactions set up as from 1 September 2013.
For all split purchases realized up to 1 September 2013, the tax authorities will still accept the use by the bare owner of funds received by donation from the usufructuary prior to the split purchase for the financing of the bare ownership, even if the donation has not be subject to the Belgian gift tax and was specifically intended to finance the acquisition of the bare ownership by the beneficiary.
Please, note that we do not agree with the tax authorities’ standpoint. For more information, please contact the members of the EY Personal Tax Services department.
Authors: Laurent Stas & Audrey De Bevere.