Withdrawal from undivided ownership shareholder-corporation: not always does the distribution right apply!

For years, the acquisition of a real estate property in undivided ownership by a shareholder with its company has been a popular tax optimisation technique. On a later withdrawal from undivided ownership, the shareholder can benefit from the distribution right at a rate of 2,5%. Recently, the Court of Cassation stated that sometimes the 12% real estate transfer tax still applies.

Principle

For long time, there has been an optimisation technique where a shareholder acquires a real estate in undivided ownership together with its company. This involves assigning to the company the largest possible share (e.g. a 95% (company) – 5% (shareholder)-ratio), since in function thereof, depreciations and other costs can be deducted. Later, when the shareholder acquires the undivided rights, the 2,5% distribution right is due.

Tax planning at risk

However, the Flemish Tax Authority (hereinafter: Vlabel) considers that the real estate transfer tax is always due on the termination of the undivided ownership between a NV¹ and its shareholder. Indeed, the Flemish Tax Code states that an acquisition, by any means, of real estate located in Belgium by a shareholder of its NV¹ is subject to the 12% real estate transfer tax. According to Vlabel, this rule should be fully applied, regardless of the lower rate that applies in principle when terminating an undivided ownership.

Note that a similar provision exists for a BV², VOF³, CommV⁴ or CV⁵ but that, specifically for these company forms, there is an exception rule wherein the 12% rate is not applied; for example, when the person obtaining the real estate from the company was already a shareholder at the time the company acquired it with payment of the real estate transfer tax. For a more detailed description of this, please refer to our previous contributions.

Ultimately, the Court of Cassation examined this issue, having previously referred to the Constitutional Court a possible violation of the constitutional principle of equality. After all, a shareholder of a NV¹ becomes subject to the real estate transfer tax, while a third party (non-shareholder) still enjoys the distribution right when stepping out of undivided ownership with a NV¹. The Constitutional Court considered that there was no discrimination here because of the voting right or control exercised by a shareholder within the company. In this sense, the Court of Cassation decided that the real estate transfer tax should be applied in priority when a NV¹ and its shareholder step out of undivided ownership. Note that a BV², VOF³, CommV⁴ or CV⁵ is not implicated here.

Remedial view of Court of Cassation possible?

Although the judgment of the Court of Cassation puts a stop to the technique with a NV¹, a number of remedial caveats can, in our opinion, be made.

For instance, stepping out of undivided ownership with a BV² etc. remains (for the time being) out of bounds, provided the conditions are met to apply the distribution right. Consequently, it may be interesting – in case of real estate property in undivided ownership with a NV¹ – to think about a conversion to another company form. After all, there are known favourable rulings in which the conversion of a NV¹ into a BV² did not qualify as a tax abuse. Note that in each case, sufficient non-fiscal motives were present, such as:

• a family succession that warrants a more private character;
• simplified accounting in the event of a decline in activities;
• the time lag between (i) the conversion of a NV¹ into a BV² and (ii) the withdrawal of the undivided real estate from the BV².

Conclusion

Although the distribution right no longer appears to be the starting point when withdrawing an undivided property from a NV¹, concrete situations remain conceivable that may still prevent the application of the real estate transfer tax. The conversion to another company form may – in certain cases – possibly provide a solution. Curious about the continuation of this saga.

Mathias De Schrijver and Evert Moonen
De Langhe Attorneys

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¹           Public limited liability company
²           Limited liability company
³              General partnership
⁴              Limited partnership
⁵           Cooperative company