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Fiscal impact of the new property law

Friday 23/10/2020
Nieuw goederenrecht

The new property law will take effect on 1 September 2021. It is more modern, functional and flexible, and provides greater legal certainty. This update was overdue as some of the rules dated back to the 19th century.

Referring to some of the previous issues, we examine whether the new law will improve matters.

Who pays for major repairs?

Current situation

The usufructuary bears the cost of normal maintenance work, property repairs are at the expense of the bare owner only.

In practice, this can lead to legal uncertainty if the usufruct of an immovable property belongs to a company and the bare ownership belongs to the manager. If the company-usufructuary carries out extensive work, the tax authorities will charge the manager for a benefit in kind for the cost price of the work. The tax authorities base their calculation on the current regulations to demonstrate that the usufructuary was not obliged, by common law, to carry out certain major repairs to the usufructuary's property.

This is what the new law stipulates

Major repairs are conditional on a duty of cooperation between the usufructuary and bare owner, subject to consultation. The bare owner can even demand a proportional contribution from the usufructuary in line with the value of his usufruct. Of course, the amount relating to the contribution duty cannot give rise to a taxable benefit in kind on the part of the manager.

What is the difference between improvement works and major repairs?

Current situation

A usufructuary is obliged to maintain the property given in usufruct. Major repairs are at the expense of the bare owner. These major repairs are listed exhaustively. Maintenance repairs are the residual category.

This is what the new law stipulates

The new property law works with open categories rather than lists.

The definition of major repairs is more wide-ranging: repairs which relate to the structure of the property or to its inherent parts or the cost of which manifestly exceeds the benefits of the property. It is not enough, therefore, for the works to have a major financial impact; the costs must also manifestly exceed the benefits.

However, it remains unclear how any improvement work carried out will relate to major repairs. A usufructuary has the right to improve the property at their own expense. Certain improvement works can be very expensive, and are consequently qualified by the tax authorities as major repairs. Because there is no clear distinction between both concepts, the law is often guided by the tax authorities. The vague distinction between a major repair and an improvement can, therefore, lead to fiscal disputes.

How is a settlement fee calculated?

Usually a usufructuary, leaseholder and superficiary are entitled to erect buildings during the period of the right in rem, providing they do not reduce the value of the immovable property. Buildings erected by a usufructuary are then subject to an ancillary right of superficies. When this (ancillary) right of superficies ends, the landowner has to pay compensation for the buildings that are legally due to him, a so-called settlement fee. This principle will not change, but the way in which the compensation is calculated will.

Current situation

According to Article 6 of the Opstalwet (Buildings Act), the so-called settlement fee must be equal to the 'value' of the buildings. It is still unclear, however, how this should be interpreted. The tax authorities like to interpret this value as the economic sales value at the time of termination of the building lease. If, after 15 years, a business manager becomes the owner of a business property erected by his company - also the building owner - this can give rise to a considerable taxable benefit, particularly if the problem is not remedied by a specific compensation arrangement.

Even before the announced legislative changes, landowners were already trying to avoid a taxable benefit by devising a detailed compensation scheme, often based on the theory of unjust enrichment. Once such a remuneration scheme has been worked out, it will be more difficult for the tax authorities to substantiate a taxable benefit.

This is what the new law stipulates

The new property law now legally links the principle of unjust enrichment to the obligation to pay compensation on the part of thelandowner. This removes a number of uncertainties concerning the budget for the settlement fee.

The estimate of the compensation implies that the owner of the building is entitled to the lower of the following two amounts: (1) the added value the building has given to the land or (2) the cost of the building. The landowner and the owner of the building are obviously entitled to deviate from this, while respecting the theory of unjust enrichment. As long as the landowner does not pay any compensation, the owner of the building has a right of retention of the building work and landscaping. However, the landowner does not owe any compensation for harmful or unlawful constructions.

What does extension of usufruct mean?

Current situation

There is currently some uncertainty about the legal possibility of extending a usufruct. The Flemish Tax Authorities are invariably of the opinion that the extension of a usufruct must be regarded as the establishment of a new right in rem, resulting in the application of 10% registration tax.

This is what the new law stipulates

The new property law clearly states that usufruct can be extended without exceeding the maximum period of 99 years. An extension will be enshrined in law. In such cases, no new agreement will be concluded and it will not constitute a transfer of a right in rem.

It remains to be seen whether the Flemish Tax Authorities will now adopt a different approach with respect to registration tax. After all, the reasoning that registration tax is due because a new right in rem is being established is no longer valid. No doubt there will be more to come on this.

Application of the new property law

The provisions of the new property law will only apply to rights in rem established after it takes effect on 1 September 2021. However, there is nothing to prevent the parties from agreeing otherwise and applying the new provisions to the future consequences of an established right in rem, e.g. the compensation arrangement at the end of the (ancillary) building right.

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Philippe Vandevoorde
Philippe Vandevoorde
Director Tax & Legal Services