Real Estate Tax Services Newsalert

Welcome to the first 2011 issue of our PwC Real Estate Tax Services Newsalert Belgium.

In this issue, we make a recap of some tax developments around VAT, substance and Belgian REIT that are of major importance to the real estate industry.

VAT

• Sale of a new building – VAT also on the land
  From 1 January 2011, the supply of land ancillary to the supply of a new building or part of a new building is subject to VAT under certain conditions. Read more
• Reduced VAT rates in the construction sector
  In 2011, several changes took place affecting the application of the reduced VAT rate in the construction sector. Read more

Changes in the Belgian REIT regime

• A new Royal Decree amending the existing Belgian REIT regime and introducing a regulatory framework for institutional REITs in Belgium was published on 28 December 2010. Read more

Recent case law on substance

• The tax authorities are challenging more and more often structures lacking sufficient substance. On 10 June 2010, the Belgian Supreme Court followed the Belgian tax authorities’ position to recharacterise (look through) a back-to-back service arrangement due to the lack of economic substance in the case at hand. Read more

VAT

Sale of a new building – VAT also on the land

From 1 January 2011, the supply of land ancillary to the supply of a new building or part of a new building is subject to VAT under certain conditions.

If a building qualifies as a ‘new’ building, it can be sold with 21% VAT (and hence no registration duties will be due).

In this respect, a building is considered 'new' for VAT purposes until 31 December of the second year following the year during which the building was first put into use. Under certain conditions, buildings that have been subject to important (transformation) works can also be considered as 'new' for VAT purposes.

In case the seller is not a professional building constructor, specific formalities need to be complied with in order for the sale to be subject to VAT (e.g. option to tax).

 From 1 January 2011, also the supply of land that belongs to a new building or part of a new building is subject to VAT in so far as the supply of the new building itself is subject to VAT. In order for that land to be subject to VAT, three conditions need to be met simultaneously:

• on the land a building is constructed and supplied with VAT
• the land and the building to which it belongs are supplied by the same person
• the land is transferred simultaneously with the building to which it belongs.

As regards the third condition, the land relating to a building is defined as “the land for which a building permit has been obtained and which is transferred at the same time as the building”. The building permit is therefore a key element to determine what part of the land should be sold with VAT.

The above equally applies to the vesting and transfer of rights in rem (long lease, usufruct, building rights). This new rule is not optional: once the above conditions are met, the transfer of the land will be subject to VAT.

The three Belgian Regions (Brussels, Flemish and Walloon Regions) have adapted their Transfer Tax Code before year-end in order to avoid double taxation, i.e. through VAT and registration duties, on the supply of land belonging to a new building from 2011.

Note that with respect to the sale (in full ownership), the vesting or transfer of rights in rem on new property, specific rules need to be kept in mind (on e.g. the tax base and the extent of the right to recover input VAT).

In line with the possibility to also submit the sale of land (relating to a new building) to VAT from 1 January 2011, the Belgian VAT Code and the Belgian VAT administrative practice have been amended on other points, too, in order to reflect the change. For instance the land acquired with VAT being charged will (just like the building on it) be subject to the 15-year VAT adjustment period.

Example:

Building value 1 000 / Land value 200

Sale of the building with VAT in 2010

1 000 + 21% VAT (VAT deductible depending on the buyer’s VAT status)

200 + 10% or 12.5% transfer taxes

Sale of the building with VAT in 2011

1 200 + 21% VAT (VAT deductible depending on the buyer’s VAT status)

As shown in the example above, the VAT rate exceeds transfer tax rates. Therefore, this new rule can result in an increase of the price for buyers not having the right to recover input VAT, e.g. private individuals, bank/insurance companies, real estate companies intending to let the building, or public authorities. Some structures can be implemented to avoid this drawback to the extent that they cannot be regarded as abusive practice.

Reduced VAT rates in the construction sector

In 2011, several changes took place affecting the application of the reduced VAT rate in the construction sector:

• The 6% reduced rate applicable to the first EUR 50,000 for the construction of private housing will be abolished.
• The 6% reduced rate applicable to demolition works followed by construction of private housing will be limited to 32 major cities.
• The 6% reduced rate applicable to immovable works in houses older than 5 years is extended.

Changes in the Belgian REIT regime

A new Royal Decree amending the existing Belgian REIT regime and introducing a regulatory framework for institutional REITs in Belgium was published on 28 December 2010.

The regulatory frame for Belgian REITs, known as the SICAFI regime has been fundamentally changed through the new Royal Decree of 7 December 2010 (published on 28 December 2010) which replaces the Royal Decrees of 10 April 1995 and of 21 June 2006. This reform (SICAFI IV reform) was needed to maintain the regime competitive in the changing financial markets on the one hand and the investor protection on the other hand.

The most important novelty of this Decree is the introduction of a regulatory framework for institutional SICAFIs. An institutional SICAFI is a real estate investment vehicle that, contrary to a public SICAFI, does not offer its shares to the public but only to institutional or professional investors (banks, insurance companies, very large companies exceeding certain thresholds, etc.). The legislator decided that an institutional SICAFI must be under the exclusive or joint control of a public SICAFI, since the institutional SICAFI is merely intended as a fiscally attractive vehicle allowing a public SICAFI to realise specific projects with third parties, i.e. other institutional or professional investors.

The new Royal Decree not only aligns it better with the legal framework for collective investment vehicles, it also provides more flexibility to attract funds. A SICAFI is under the new regime explicitly allowed to issue securities other than shares (e.g. convertible bonds) and henceforth a SICAFI can increase its share capital through an accelerated procedure without application of the normal preference rights (provided that existing shareholders receive an irreducible allotment right upon distribution of the new shares). Furthermore, the new Royal Decree also increases investor protection (strengthening of the conflict-of-interest rules and the mortgage and debt restrictions, increasing the independence of the real estate expert and of the management, expanding the responsibility of the promoter especially in respect of the free float) and no longer requires the appointment of a depository.

As regards the tax regime applicable to SICAFIs, the alignment of the tax treatment of a public and an institutional SICAFI already dates back to December 2008, but the possibility for institutional SICAFIs to benefit from the advantageous tax regime remained theoretical until the regulatory framework for institutional SICAFIs was introduced by the new Royal Decree.

With respect to the so-called exit tax (i.e. the tax that is due when an existing company obtains SICAFI status), it has been clarified in a circular letter of 25 February 2011 that the reduced tax rate of 16.995% (half of the normal rate) applies only to the latent capital gains and the tax-free reserves. The other tax result will be subject to the standard tax rate of 33.99%.

Recent case law on substance

The tax authorities are challenging more and more often structures lacking sufficient substance. On 10 June 2010, the Belgian Supreme Court followed the Belgian tax authorities’ position to recharacterise (look through) a back-to-back service arrangement due to the lack of economic substance in the case at hand.

Tax planning without appropriate economic substance is under big pressure. There is indeed a clear tendency for tax authorities to challenge structures with insufficient substance. The OECD Guidelines state that tax administrations should recognise actual transactions undertaken by associated enterprises as they have structured them, using the methods applied by the taxpayer in so far as these are consistent with the methods described in the Guidelines.

This approach of (economic) substance over (legal) form is not to be found in Belgian tax law. As a matter of fact, the tax authorities have to recognise the legal form of transactions. In the Brepols case (1961) and the Au Vieux Saint-Martin case (1990), the Belgian Supreme Court clearly stated that taxpayers have the right to choose the most tax-friendly approach as long as they do not violate any legal obligations and accept all the consequences of their contract, even if the form the parties give to their contract is not the most common one

As said, the Belgian tax authorities have to recognise the legal form of transactions that are undertaken. When the conduct of the parties does not conform to the terms of their contract or when the parties’ conduct indicates that the contractual terms have not been honoured, with the aim of avoiding paying taxes, this will be characterised as sham. In cases of sham, the tax authorities are obliged to look at the actual transactions undertaken and disregard the terms of the contract.

In 1993, a general anti-avoidance measure was introduced in Belgian tax law (section 344 (1) BITC) stating the following: “Against the administration cannot be upheld the legal classification given by parties to an act/separate acts realising one single transaction when the administration establishes that such classification is aimed at avoiding tax unless the taxpayer proves that this classification meets legitimate financial or economic needs”.

Due to the very strict conditions of the anti-abuse provision, in practice, the provision is rarely applied. In several cases ruled on by the Supreme Court (in 2005 and 2007), the latter indeed confirmed the interpretation that re-characterisation can only occur where the re-characterised act has similar legal consequences as the original act.

In its judgment dated 10 June 2010, the Belgian Supreme Court allowed the re-characterisation of two transactions. In that case, company A concluded a service agreement with company B against a certain remuneration. On the other side, company B concluded a management agreement with company C for the same services against a lower remuneration. It is important to note that company B was not able to provide any services in the absence of any tangible or intangible assets.

The tax authorities invoked the anti-abuse provision in order to re-characterise the transaction into (i) a management agreement directly concluded between company A and C for the amount of remuneration that was initially agreed between B and C and (ii) a payment without counter-performance (difference between the initial remuneration agreed between A and B and the initial remuneration agreed between B and C). The Supreme Court gave right to the tax authorities by arguing that it is possible to re-characterise successive agreements between several parties and consider them as one agreement between parties that have not directly concluded the agreement, but only to the extent that it is the same transaction from an economic viewpoint.

This court case seems to imply a change in the position of the Supreme Court as, according to the interpretation given by the Court in the above judgement, the anti-abuse provision might be invoked in practice where several acts taken together form one and the same transaction from an economic viewpoint. This court case should also be seen as a clear warning. Therefore it is of the utmost importance that transactions/structures have sufficient economic, legal and physical substance.