The Belgian tax authorities have been keeping a close eye on the tax treatment of private real estate in the company for some time. New theories lead to changing case law. What is certain is that a solid and sufficiently comprehensive rationale is essential to maximise the chances of acceptance.
Where does the problem lie?
Expenses incurred by a company are tax deductible only if they are incurred to obtain taxable income. If these expenses relate to the free provision of real estate to a business manager for the accommodation of his family, they do not generate direct income. The provision forms part of the remuneration package of the business manager, for whom this becomes a taxable benefit in kind. If the business manager can show that he or she performs services for the company and thus generates taxable income, this means - at least indirectly - taxable income versus the expenses. The Court of Cassation also confirmed this in 2016.
Much ink has already been spilled in case law and tax doctrine over this line of reasoning, known as the "remuneration theory". Often the proof of those services, and/or the link with the remuneration, turns out to be insufficient.
Remuneration theory: two recent rulings
Two recent decisions of the same Antwerp Court of Appeal illustrate that no two cases are the same.
Clear justification and documentation
An initial ruling on 18 January 2022, concerned a doctor's company that had full ownership of a home that also housed a doctor's surgery (accounting for 20% of the surface area). The private part (the remaining 80%) was made available to the doctor, who was taxed on it. The granting of this benefit was recorded in the minutes of the annual general meeting.
For the first few years, the tax authorities accepted the expense deduction. That changes, however, if the company increases the business manager’s cash remuneration. The tax authorities believe that as a result of this increase, it is no longer proven that services are performed in return for which that benefit is provided. According to the tax authorities, those services would already have been adequately compensated by the increase in remuneration.
In this case, the Court accepted the taxpayer's counterarguments. The company had a large turnover that had steadily increased over the years. The doctor-business manager was the only person active in the company and the only one to whom the turnover could be attributed.
Similarly, a second ruling on 29 March 2022 concerned a doctor's company that owned a home in full ownership. It made that home entirely available to the business manager. There was no doctor's surgery. However, the minutes of the annual general meeting mentioned only for one of the years in question and only very briefly and without much detail the granting of the benefits to the business manager. In the other year, no mention whatsoever was made of the granting of benefits.
In this case, the Court considered that no proof had been given of actual services performed. The reference to services performed was only very general and with very limited documentation. The company's figures did not show any actual services performed either.
Does the capital gains theory offer a way out?
Another way to demonstrate taxable income in respect of the company concerns the capital gains potential of the property. If such a capital gain is realised in the future, it will be taxable in respect of the company. This course of action applies insofar as the company is the full owner, and not just a usufructuary or superficies holder. Although a taxable capital gain is not completely ruled out in those cases either.
The Court of Cassation stated in 2020 that this may indeed be a motive to justify the expense deduction. However, it specifies that the mere likelihood of capital gain is not sufficient. There must be an intention to realise a capital gain. So again, it is important to be able to demonstratethat this intention already existed at the time of purchase.
The capital gains potential was also raised in the above-mentioned ruling of 29 March 2022. Yet on that point, too, the Court ruled that the company could not show that it had intended from the beginning to realise a capital gain on the property. A general upward trend in the real estate market is insufficient to justify the expense deduction related to the property. Likewise, the company could not demonstrate any concrete expected revenue.
What about the rental strategy?
If a property is let to, say, the manager of a company, it can be argued that there is taxable income in return for the investment.
The rental income, however, must not be purely symbolic or structurally understated. Furthermore, a lease for a limited period of the year is not sufficient. An investment of which the expected income does not enable the company to realise a positive return, and which is therefore structurally loss-making, may also fail to meet the burden of proof. The same applies if the rent matches the amount of the benefit in kind.
Here, too, it is important to be able to demonstratethat the expenses are in keeping with an investment plan with a positive outcome.
Sound implementation, rationale and proof
The guiding principle is probably becoming clear to you. Case law teaches us that the remuneration theory, the capital gains theory and the rental strategy as such contain good arguments to justify the tax deduction of expenses related to private real estate. Yet a sound implementation, rationale and proof are essential in any strategy.
We therefore gladly give you a few tips for each strategy.
- Real, demonstrable performance of services, preferably substantial enough to justify the provision of a benefit, is important. A manager of a real estate company who manages just one or a few properties will probably fail to offer this proof.
- Prepare a remuneration report in which you describe the composition of the salary. Justify that in light of the services performed and the taxable income to be received in return. Reference to additional services or the reduction of the cash remuneration component to compensate for the benefit provision are not necessary. Yet they can be helpful.
- Indicate the benefit on the form and include the benefit in the business manager's personal income tax.
- Ensure approval of the remuneration by the annual general meeting with a reference to the remuneration report.
- A mixed use, at least partly professional, is more likely to be successful than a purely private use such as a second residence on the coast.
- A financial plan that shows a positive return by comparing investment and other property costs with budgeted rental income is important.
- Provide a rationale for the budgeted rental income by, for example, making a comparison with similar properties or by referring to the report of a surveyor.
- Record the investment decision and its importance to the company. Where appropriate, also from the perspective of a potential conflict of interest between the business manager and his company.
- Draw up a tenancy agreement and have it registered.
Capital gains potential: additional points
- Provide a justification for the intended price increase, for example based on future projections or on past statistical information.
- Include the intention to realise such a capital gain. One way to do so is to add this to the investment decision as minuted.
Good to know. If only the usufruct of the property is held, there are additional issues that we will not go into here. However, don't hesitate to contact us if you have any questions about that.
Moral of the story: a solid rationale is essential. Since that rationale must be more comprehensive today than in the past in order to maximise your chances of success, it would be advisable to evaluate existing arrangements with private real estate and, where necessary, provide additional justification.
Do you have questions about this or would like help with this? Be sure to contact our experts.