The sale of real estate in Belgium is subject to registration duties of 10% in the Flemish region and 12.5% in Brussels and the Walloon region. In order to make real estate investments more attractive (ie, less costly), the real estate investment market in Belgium developed split-sale structures to divest or acquire real estate. Since the 1990s many investment transactions were structured using the split-sale format.
In a split-sale structure, a long-term lease right on the property was acquired by a special purpose vehicle via an upfront payment of all fees due under the long-term lease (ie, the canons), while the remaining bare ownership rights of the property were acquired by a related special purpose vehicle. The long-term lease – whose value represented up to 95% of the property value – triggered only a registration duty of 2% (until recently 0.2%) and the registration duty of 10% to 12.5% was levied only on the bare ownership rights, which represented a limited share of the real estate value – sometimes as limited as 5%. The result was a considerable saving on registration duties, as the total registration duty costs dropped on average to approximately 1% of the transaction value. At first, cautious investors had this structure backed by a ruling issued by a tax administration commission. The ruling clarified how tax laws would be applied to a specific situation or case, allowing the parties to avoid the transaction being recharacterised by the tax administration afterwards. The ruling granted certainty to investors insofar as parties stuck to the structure presented by the commission. Eventually, the commission published guidelines setting out the conditions to comply with to avoid the recharacterisation of and the imposition of higher registration duties on transactions.
In 2012 new anti-avoidance clauses were introduced to tax codes which made the survival of the split-sale structure unlikely. In 2013 the federal tax administration issued an internal letter in which it stated that split sales between related parties were to be considered tax abuse. If parties could not demonstrate considerations other than tax advantages, registration duties of 10% to 12.5% were to be levied on the full value of the real estate product. This meant the abrupt end of the split-sale structure in the Belgian real estate investment market.
Two new tax rulings were published in June and December 2014 by the ruling commission, which have made split-sale structures possible again as long the following conditions and requirements are met:
- In order to counter the 2013 internal letter, the long-term lessor and long-term lessee must be independent parties and cannot become related parties during the term of the long-term lease.
- The value of long-term lease rights and bare ownership rights must have a market value. The value of bare ownership rights (burdened with a 99-year long term lease) cannot be lower than 8% and should be within the range of 8% to 11%.
- The long-term lessor must make a normal return on investment during the long-term lease right and thus periodic payments must be made by the lessee (eg, a yearly fee of 4.5% of the value of the bare ownership rights – a range between 4 and 7% is to be considered).
- The long-term lessor cannot acquire the long-term lease right in whatever form during the long-term lease right.
Given these conditions, a revival of the split sale requires the participation of a third party in order to acquire the bare ownership rights, as the structure can no longer be set up between related companies. The search for a long-term investor in bare ownership rights of properties can thus begin. The parties can become land banks, which can benefit from a return of 4% to 7% on their investment.
As of January 1 2015, the ruling commission is the competent administration for Brussels and the Walloon region only and not the Flemish region. This is a result of the changes set out in the sixth state reform of Belgium. Therefore, real estate investments in Flanders cannot benefit from these two tax rulings.
In early April the competent minister, Annemie Turtelboom, announced the preparation of a ruling capacity for Vlabel (the Flemish tax administration). This will require some legislative adaptations to give the Flemish tax administration's decisions the character of rulings. The minister indicated that Vlabel will also honour rulings made prior to January 1 2015 by the federal ruling commission. This will be beneficial for future real estate investments in Flanders.
It is a positive step that the split-sale structure can be used again to reduce the high burden of registration duties levied on the transfer of ownership of real estate. Given the more restrictive conditions imposed on split-sale structures, it is likely that the second wave of split-sale structures will be more moderate, unless the appetite for land banks is high enough.
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