The media recently reported that in the future the tax authorities will closely monitor if the valuation of the usufruct – in case of a split purchase (usufruct / bare ownership) of real estate – is performed on the basis of correct criteria.
Benefits of split purchase
The purchase of a property where a manager buys bare ownership and his company the usufruct, offers many advantages. For example, the manager will only have to finance the acquisition of bare ownership from private funds, while the company bears the financial burden of the usufruct. In principle, the manager only bears the costs of major repairs such as those of heavy walls and vaults. All other maintenance work shall be for the account of the company. The company can depreciate these investments or take them directly into costs. In addition, the parties may deviate from this and stipulate that the major repairs are also for the account of the company.
Because the usufruct expires after its duration and accrues (free of charge) with the bare ownership, a manager can acquire the full ownership of a property in a financially and fiscally very advantageous way, while his company has borne the most important costs.
Valuation of usufruct
Although the right of usufruct was already known in ancient Roman law, there is still no legal basis in the year 2018 to calculate its value for the income tax or the sales tax. Hence, multiple valuation methods have been developed over the years, of which the most famous is the so-called Ruysseveldt method. This method is based on the updated, indexed rental value of the property over the duration of the usufruct. The actualisation of the rental value is based on the interest paid on government bonds.
The Ruysseveldt method is a frequently used method for many valuations of usufruct schemes in Belgium, but has come under increasing criticism in recent years, mainly because it leads to an overvaluation of the usufruct. Sometimes the value of the usufruct is even higher than that of full ownership, which is of course impossible.
Split purchase of real estate can lead to a benefit in kind
Because of the weak points of the Ruysseveldt method (as well as other valuation methods), this method is under fire by the tax authorities. In a number of cases, the tax authorities try to tax the manager on a benefit in kind. The tax authorities calculate the value of the usufruct on the basis of a method introduced in 2016 by the Advance Decisions Department. This method is unique in that the rental value is not indexed and by applying a discount rate corresponding to a break where the numerator is equal to the net rental value and the denominator is equal to the value of the full property.
The tax authorities’ method results in a lower valuation of the usufruct. The difference between this valuation and the valuation used by the manager and his company is taxed by the tax authorities as a benefit in kind for the manager (accompanied, where appropriate, by tax increases).
Is this the end?
In some cases, the tax authorities’ valuation method is followed by case law, but it is not inviolable. Indeed, other recent judgments show that the valuation methods used in the past by taxpayers are still valid.
In addition, the valuation method of the tax authorities is not perfect either. For example, the use of one single method for all situations of usufruct remains plagued by limited premises and does not take into account e.g. external financing for the purchase of the property.
Finally, for the calculation of registration fees and inheritance taxes, there are legally anchored valuation methods. The practice of the tax authorities has no impact on these taxes.
Nevertheless, it is worthwhile to assess the valuation of your usufruct against the practice of the tax authorities.
Kim Bronselaer – Evert Moonen
Published in VOKA – “Ondernemers Oost-Vlaanderen”, edition 4, March 2018