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Vlabel confirms method of levying registration duties

Wednesday 30/01/2019
wooden house in sunshine

On 10 December 2018, a remarkable position was published on the Vlabel website (Position no 18083 of 26 November 2018). The real estate tax system is becoming more and more sophisticated with more (tax) advantages. The question must therefore be asked whether the well-known "simple" usufruct will not be partially replaced by transactions with a double or successive usufruct. In the area of registration duties, however, there were a number of uncertainties in this respect. That is why Vlabel was asked a question on an informal basis.

Successive usufruct: what is it?  

The term "successive usufruct" can be defined as a usufruct right established under the condition that at the end of this (first) usufruct, the usufruct right belongs to a third party. The successive usufructuary will therefore only take possession of the immovable property if he survives the right of the initial usufructuary.

Concrete example of successive usufruct

In order to situate Vlabel's decision, we first give a real-life example:

A company wants to acquire real estate. However, because of the risk of bankruptcy, the company does not want to acquire full ownership, only usufruct. The bare ownership will then be transferred to the private individual or their children. When the children suddenly acquire bare ownership, everything is in order succession-wise, but the parents lose their funds for a rainy day. If the parents acquire bare ownership themselves, the problem is reversed: the parents keep their funds for a rainy day, but in terms of succession planning for later, this is less attractive as an option.  The acquisition of the successive usufruct by the parents and the bare ownership by the children can, therefore, be a solution to the above conflict. In practice, the children will then acquire the bare ownership of the real estate, the company the initial usufruct (for example for 30 years) and the parents (who are also managers of the company) the successive usufruct for life. The parents will only take possession of the real estate after the initial usufruct of the company has been extinguished. The company, the parents and the children will each have to pay the part of the price that represents their rights (in rem) at the time of purchase of the real estate.

In simple terms, the situation is as follows. If the first usufruct ceases to exist (due to the expiry of the term, the bankruptcy of the first usufructuary, etc.) and the successive usufructuary is still alive, the latter enters into lifelong usufruct (unless contractually stipulated otherwise).  The usufruct was therefore still not up to bare ownership and the bare owners must therefore remain on the sidelines for a while. If successive usufruct also comes to an end (e.g. due to the death of these usufructuaries in the event of a lifelong successive usufruct), the bare owners eventually become full owners. However, it may also be the case that the successive usufructuaries (parents) themselves die before their initial usufruct expires. In this case, the bare owner becomes full owner immediately after the expiry of the first usufruct, as there are no longer any "active" successive usufructuaries who act as intermediaries.

Although this does not seem to be an everyday story, there are many potential cases of application. Due to the increasing life expectancy, it is often a somewhat simplistic solution to designate the children as bare owners at the end of the first usufruct.

Problem of registration duties

Although the application of the registration duties on this transaction seems clear at first sight, this is not the case. The situation is clear for the initial usufructuary (in our example the company) and the bare owner. They will owe registration duties at the time of purchase. For the successive usufructuary, however, this is not entirely clear. The question can be asked whether the moment of enforceability of the duties coincides with the moment of the purchase or the moment usufructuaries actually take possession. The moment usufructuaries actually take possession occurs when the usufruct ends (because the term ends or, for example, because of bankruptcy) and the successive usufructuary is still alive. The question is, therefore, whether the registration duties are currently due or at the time of the establishment of the usufruct. The answer to this question has a major impact on the tax base and on the rate payable, as will be further clarified below.

Firstly, it must be decided whether the purchase of the successive usufruct should be considered as contract under suspensive condition or not. This (civil) question is of great importance since Article 2.9.7.0.3, §2 VCF stipulates that the right to sell on a legal act that is subject to suspensive condition is only due if the condition is fulfilled. Therefore, if it were to be assumed that the successive usufruct could be qualified as an agreement under suspensive condition, this would mean that the registration duties would only be due at the moment the successive usufructuaries actually take possession and - more importantly on the value of the usufruct at that moment.

In order to clarify this, we reduce the example described above to its numerical form, taking the following as a starting point:

  • Land value: € 120,000
  • Property value: € 180,000
  • Annual rent value: € 12,000
  • Duration of initial usufruct: 30 years
  • Age of father: 53 years old
  • Age of mother: 52 years old 

Since this is a didactic example, the value of the usufruct and bare ownership are random percentages. Based on these data, an initial usufruct of 62.25% or €186,759.10 is obtained. The same assumptions are used to calculate the value of the successive usufruct, but with the difference that the duration of the usufruct is lifelong and that the age of the father is 53 years (born on 7/11/1965) and the mother 52 years (born on 7/11/1966).

When valuing the successive usufruct, the probability that the parents will actually take possession of the property is calculated (based on mortality tables). In other words, the life expectancy of the successive usufructuaries is examined. On the basis of this probability, the updated use value for the successive usufructuaries can then be calculated. The same exercise is then also made from the point of view of the bare owners (children).

On the basis of these parameters, the successive usufruct is valued at € 28,225.25. This means that the value of the children's bare ownership is € 85,015.65. Below, the valuations are shown schematically for the sake of clarity.

  • Children's bare ownership (B) = € 85,015.65
  • Company usufruct (A) = € 186,759.10
  • Successive usufruct of parents (C) = € 28,225.25
  • Total of the above valuations = € 300,000 

Everything is clear to the company. The company will pay its registration duties at the time the usufruct is established. It will pay 10% registration duties on the value of the usufruct. The fixed value will not have to be calculated as it is a joint acquisition. Moreover, the children will be liable to pay registration duties immediately, provided that the total sale price is not lower than the total sale value (7% or 10% depending on the situation).

However, this is less clear to the parents. If the establishment of successive usufruct is not considered as a contract under suspensive condition, the parents will immediately owe registration duties (i.e. at the time of the purchase of the successive usufruct). In our example, the tax base will then amount to € 28,225.25. The parents will then no longer owe registration duties when they actually take possession of the property.

  • Parents' tax base = € 28,225.25
  • Company tax base = €186,759.10
  • Tax base children = € 85,015.65
  • Total taxable base = € 300,000 

However, if the purchase of the successive usufruct is considered to be a contract under suspensive condition, the situation is somewhat more complex. The registration duties will then only be due when the condition is met (Article 2.9.7.0.3, §2 VCF). At the beginning (time of purchase) the children pay € 8,501.57 in registration duties, the company € 18,675.91 and the parents (successive usufructuaries) € 0.00. If the parents (successive usufructuaries) survive the initial usufruct, they will be liable to pay registration duties on the price or on the fixed valuation of the successive usufruct at that time (on the higher of the two) (in line with Article 2.9.7.0.3, §2 VCF). Given the dated nature of the price, it will probably always be on the fixed value. We have calculated this in our example. Based on the fixed valuation method, successive usufructuaries would be liable to pay registration duties on a taxable basis of € 43,472.68. However, in the event that the parents do not survive the initial usufruct no registration duties will be payable at all on the purchase of the successive usufruct.

In practice, this situation could cause many problems or inconvenience. It is true that lower registration duties may have to be paid than compared to the purchase of the same fully owned property. This is the case in the unfortunate event that successive usufructuaries do not survive the initial usufruct. On the other hand, there is also the risk that more registration duties will have to be paid in total than if the full property were purchased. This may constitute an increase in the cost - although there is, of course, also the temporal advantage - of the proposed transaction and thus possibly an obstacle to its attractiveness.

The pressing question

Since the above situation seems anything but fair and could cause a great deal of (legal) uncertainty, Vlabel was interrogated about this. The angle in all of this was that the purchase of the successive usufruct should be qualified as a probability contract and not as an agreement under suspensive condition. In the Civil Code, a probability contract is defined as follows: “A reciprocal agreement, the consequences of which, in terms of profit and loss, either for all parties or for one or more of them, depend on an uncertain event”. It was argued that this concept is much more in line with the character of successive usufruct. Successive usufructuaries pay a price for a right in rem of which they are not sure at the time of purchase that they will ever own.

If the parents from our example die prematurely, they will never be able to use their right in rem. Also the purchase price will not be refunded. The latter is the crucial difference with a contract under suspensive condition whereby the purchase price is refunded if the suspensive condition comes to pass. Moreover, in the case of a probability contract, the registration duties are immediately due at the time of purchase, which only benefits (legal) certainty.

Vlabel's response

Without specifying that successive usufruct must be qualified as a probability contract, Vlabel confirmed in its reply that the registration duties (i) are due at the time of purchase and (ii) the tax base may not exceed the value of full property. A few days after this question was answered, Vlabel published the decision mentioned in the introduction on its website.

Conclusion

Vlabel clearly opts for the most pragmatic and legally most correct solution, something which can only be applauded. All parties immediately know the level of registration duties that will have to be paid, which only benefits the transparency and clarity of these transactions.  

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Bert Lutin
Bert Lutin
Partner Tax & Legal Services