When a real estate promoter realizes a project, the capital gain will be taxable in direct taxes (asset deal). Since such a project qualifies as new real estate, VAT is also due. A solution to escape this heavy tax burden could be to found a project company in order to build and sell the intended project.
When a project is completed, the real estate promoter sells his shares in the project company to the buyer (share deal). The capital gain drawn up by this, is exempt (in corporate tax). Moreover, no VAT is due on the transfer of the shares. The Belgian tax authorities consider this set of actions as an artificial construction constituting tax abuse, as a result of which the tax authorities have already repeatedly reclassified them as “project development services” or the “sale of a new real estate project”.
After some lower courts ruled in favor of the real estate promoter in this regard, certain Courts of Appeal have now ruled likewise.
Not an isolated case
In the past the tax authorities have repeatedly attempted to classify the use of project companies in real estate projects as tax abuse. In doing so, they reclassify the sale of the project company’s shares as a “sale of the real estate project” itself or as a “remuneration for services of project development”. The project companies are therefore always regarded by the tax authorities as a purely passive intermediary.
In this regard, the jurisprudence always concluded that no abuse was proven by the tax authorities, referring to the case law of the European Court of Justice concerning VAT abuse. Wherein the Court labels purely artificial constructions that are unrelated to economic reality and that are only intended to obtain a abuse tax adventage as abuse.
However, the fact that real estate promoters use project companies has not only tax, but also non-tax advantages, such as facilitating and streamlining permit applications, coordinating plans and construction works, grouping risks and liabilities, et cetera.
Consequently, both the lower courts and the Courts of Appeal conclude that the use of project companies is a common market practice in project development and does not constitute tax abuse. In addition, they also state that acquiring real estate by transfering the shares is a customary and economic transaction.
The attempts by the tax authorities to invoke tax abuse when using a project company thus repeatedly run up against case law in favor of the taxpayer. This is a good situation for real estate promoters who often apply this practice.
Eline Depaepe and Evert Moonen
De Langhe Attorneys