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End of the division levy for a property transfer from a company?

Tuesday 24/05/2022

In a recent ruling, the Constitutional Court restricted the application of the division levy in the event of a property transfer to the shareholders of a limited company. A conversion to a private limited company could provide a solution, but it is advisable to proceed with caution.

Registration duties: division or sales levy

If a property belongs to several co-owners and they decide to abandon their joint ownership of it, the transaction will be subject to a division levy. In Flanders this currently amounts to 2.5%. If you sell a property, the transaction will be subject to a 12% sales levy (since 1 January 2022).

The transfer of a property from a company to its shareholders is in principle also subject to sales duty as a result of a tax assumption. In tax practice a property is, therefore, transferred from the outset in undivided ownership between the shareholder and the company, for example, at a ratio of 99% to 1%. This means that when a transfer is implemented the much more interesting division levy applies rather than the sales levy.

Government's position

In 2014 the Federal Public Service Finance ruled that in the event of a transfer to shareholders, sales duty must take precedence over division duty. This was based on the priority of lex specialis over lex generalis. In 2015 the Flemish Tax Administration (VLABEL) also adopted this position.

Although this approach was met with a lot of criticism, case law also endorsed this view in the event of a transfer by a limited company to its shareholders. A cassation appeal was subsequently lodged against this. The Court of Cassation then submitted two preliminary questions to the Constitutional Court in order to verify whether this view violates the principle of equality.

The Constitutional Court confirmed: no discrimination

The above approach implies that sales duty is applicable when a natural person-shareholder decides to terminate their joint ownership. However, a natural person who is not a partner can still apply the division levy. No distinction is made as to whether the partner has already paid sales duty (in conjunction or not in conjunction with the company), or whether they acquired the property without ever having paid sales duty.

To the preliminary question as to whether this approach violates the principle of equality, the Constitutional Court replied that it does not.

The Court's ruling appears to firmly put a stop to allowing a limited company and its shareholders to make the purchase and subsequent allocation of the property fiscally beneficial by applying the division levy. Sales duty consequently remains in force, even though from a legal point of view it is still a question of withdrawal from joint ownership.

Not all doom and gloom

Although this optimisation approach is not available to a limited company (nv) it does not alter the fact that a private limited company (bv) can still make use of the division levy.

Sales duty is subject to two exceptions for shareholders of a private limited company. If the conditions for these exceptions are met, the transfer will be taxed in accordance with the common law nature of the legal transaction. In other words, the assumption of sales duty is side-lined, as a result of which the division levy is reinstated.

  1. A first exception applies if the acquirer is a historical partner, i.e. that a shareholder who previously incorporated the property into the company already was an existing shareholder at the time the company acquired the property subject to payment of registration duties.
  2. A second exception relates to the so-called anticipation rule whereby only a general fixed duty of 50 euro is applied during settlement or reimbursement of contributions. At the time of the subsequent allocation, it will then be verified whether the property is allocated to a historical partner. If so, the division levy will apply in this instance too.

This position was specifically confirmed in the Federal Position dated 23 October 2018 and in several preliminary decisions by VLABEL.

The solution: change from limited company to private limited company?

This difference in treatment might encourage taxpayers considering a transfer to convert their limited company into a private limited company. The question is whether this would constitute tax avoidance.

In a previous decision dated January 2021, VLABEL did not qualify the conversion of a limited company to a private limited company followed by a property transfer as tax avoidance.

What was the situation at the time?

It concerned a limited company which was set up with the aim of accommodating three different activities within the company. In order to carry out these activities, the entire ground floor of the property built by the company was considered to be used for professional purposes. The company’s activities decreased over time and a conversion from limited to private limited company seemed appropriate. The motivation for the conversion was, on the one hand, reduced activity and, on the other hand, the fact that there was no longer a need for the transparent nature of a limited company.

Three years after the conversion, only one of the three activities was still generating income, but these activities also decreased and it was consequently decided to convert the private limited company into a one-man business. The company was liquidated and the property was divided amongst the shareholders.

VLABEL agreed to the application of the division levy in the above mentioned instance because there were several non-fiscal motives for the conversion. Moreover, the shareholders who received allocations were qualified as historical partners.

Caution remains advisable

Obviously, one positive ruling is not the be all and end all. Before you decide to transfer property, always check whether a conversion might be interesting, providing there is no question of tax avoidance of course.

In order to minimise this risk, it is advisable to motivate a legal status conversion on the basis of reasons other than mere tax savings. The period between the conversion and the transfer of the property can also be significant. The longer the period between the conversion and subsequent transfer, the more difficult it will be to demonstrate unity of purpose between the two.

If you would like further information concerning division and sales levies, please do not hesitate to contact our team.

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