Belgian tax updates: transfer of real estate under partial demerger and new guidelines on allocating stock of exceeding borrowing cost

The Belgian ruling commission's 2022 annual report features two notable decisions on restructuring operations. The first decision concerns tax-neutral partial demergers and the allocation of exceeding borrowing costs. The ruling commission emphasizes that the stock must be transferred to the company receiving the debts and income triggering these costs, prohibiting taxpayers from freely determining the allocation. The second decision addresses a partial demerger involving real estate transfer within a family-owned structure. The ruling commission denies a favorable decision, deeming the anticipated operations unnecessarily complex and designed to avoid capital gains taxation. This serves as a cautionary reminder for taxpayers engaging in tax-neutral partial demergers involving immovable assets, urging them to demonstrate that their operations are not solely tax-driven. Failure to do so may result in corporate income tax liability and potential fines. Furthermore, the ruling commission does not address the eligibility of the operations for registration duty exemptions, which could significantly impact the tax burden on the company receiving the assets.

Each year the Belgian ruling commission issues its annual report listing the most noteworthy decisions rendered over the past year. As to restructuring operations, the 2022 report that has just been released (DOC 55 3350/001) contains two decisions.

The first pertains to the allocation upon a tax-neutral partial demerger of the demerged company’s stock of exceeding borrowing cost generated by applying Belgian ATAD interest limitation rules. On that matter, the ruling commission considers that the stock must, by principle, be transferred to the company receiving the debts and the receivables the expenses and the income of which have triggered the exceeding borrowing cost. In the event those receivables and debts are to be linked to several involved entities or do no longer exist, the ruling commission agrees upon an allocation of the stock between the involved companies in proportion to the net fiscal value of the elements that each of them has received following the partial demerger. As to potential alternatives to this apportionment formula, the ruling commission is crystal clear: the taxpayer is by no means free to determine how to allocate the exceeding borrowing cost of the (partial) demerged company. It seems thus that the tax authorities will not tolerate any form of creativity from the taxpayer on that aspect.

The second decision relates to a partial demerger involving the transfer of real estate. The fact of the case can be summarised as follows. Two real estate companies – company X and company Y – are owned by the same family. Company X’s real estate consisted of, on the one hand, student flats and, on the other hand, an office with a car park.

With this background, the family envisaged transferring X’s shares to company Y so that the latter would become the parent of company X at 100%. In this case, company Y would effectively absorb company X through a tax-neutral silent merger. After this merger would follow a tax-neutral partial demerger of Y, the purpose of which would have been to transfer the office with the car park to company Z, a company held by C – a member of the same family. It was agreed between the family members that C will ultimately hold the totality of the new shares issued by Company Z in remuneration of the contributed immovable asset.

The family then asked the ruling commission to confirm that the application of the tax-neutral regime – as it applies for corporate income tax purposes – to the contemplated merger and demerger would not be challenged by the tax authorities upon a tax audit because they should consider these operations as tax abusive.

After considering all the facts, the ruling commission concluded that the complexity of the anticipated set of operations is purely artificial since the outcome could have been achieved far easier with company X selling its real estate directly to company Y and company Z. In other words, the ruling commission has thus considered that the primary purpose of the contemplated set of operations was to artificially avoid the taxation that would have been due on the capital gains realised upon the transfer of the real estate had company X decided to sell it directly to the interested companies. On that motive, the ruling commission denied rendering a favourable decision.

This decision could be viewed as a reminder from the ruling commission to be very cautious when envisaging to perform a tax-neutral partial demerger involving a transfer of immovable assets. The taxpayer carrying out such operation must be prepared to demonstrate before the tax authorities, in case of a tax audit, that its operation is not mainly tax-driven, which is generally easier said than done. Failing that, the contributing company will be subject to corporate income tax (standard rate of 25%) on the capital gains realised upon transferring the immovable assets. Even worse, this already unpleasant tax adjustment will in most cases come along with the application of a minimum tax basis should the tax inspector apply a 10% (or more) proportional fine following the tax audit.

Finally, one must point out that the ruling commission did not formally address whether this set of operations was eligible for the tax exemption regime as it applies for registration duties.

It is important to consider this issue, as failing to do so would lead to the company receiving the assets facing a significant increase in taxes due to the lack of registration duty exemptions provided for restructuring operations; the standard registration duties for the transfer of immovable properties in Belgium is currently 12% of the market value of assets transferred in Flanders and 12.5% in Wallonia and Brussels. When it comes to partial demergers, determining the answer to this question becomes even more intricate. This is because obtaining a complete exemption from registration duties typically requires evaluating whether this operation can be regarded as a contribution of a business line from a tax standpoint.

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