The new anti-abuse provisions enacted by the law of 29 March 2012, effective as of 1 June 2012, have an impact on “split-sale” transactions. This paper addresses the matter from the viewpoint of both past and future transactions.
On 29 March 2012, the Belgian Parliament passed a law introducing new general “anti-abuse” provisions in Belgian tax law. These new anti-abuse provisions replace previous ones which were considered to be broadly ineffective. The new law was published in the Belgian Official Journal on 6 April 2012, and on 4 May 2012 the tax authorities issued an official memorandum aiming to comment on the new provisions (circulaire/aanschrijving AAF/2012-0219).
This paper examines the impact of the new anti-abuse provision of the Registration Duties Code (“RDC”) on the so-called “split-sale” transactions.
The new tax provisions
Under the new anti-abuse provision of the RDC (article 18 § 2 as amended by article 168 of the law of 29 March 2012), a transaction in the legal sense or a series of transactions in the legal sense forming one single transaction in the economic sense will not be binding (opposable/tegenstelbaar) upon the tax authorities if they are able to demonstrate that there is a “tax abuse” (abus fiscal/fiscaal misbruik).
Two criteria are used to assess whether there is a tax abuse in a given situation : either the taxpayer is placing himself, in violation of the purpose of a given provision of the RDC (or its implementing decrees), outside the scope of said provision; or the taxpayer pretends to obtain a tax benefit foreseen in a given provision of the RDC (or its implementing decrees) when the grant of such tax benefit would be in violation of the purpose of said provision and his primary purpose is to obtain the tax benefit in question.
In order to apply this new provision, the tax authorities need only demonstrate that a tax abuse is present. The taxpayer must then demonstrate that the transaction he put it in place was justified by reasons other than tax evasion. It should be noted in this respect that the new provision is more restrictive than the previous one, partly because it provides that negligible non-tax reasons, whether or not they are specific to the transaction, may not be invoked to justify a transaction that is otherwise driven by tax reasons.
The new anti-fraud provisions apply as from 1 June 2012.
Against this new legislative background, one may legitimately wonder whether the split-sale structures will still be permitted in the future when structuring real estate transactions.
What is a split sale of real estate ?
In a split-sale, the investor uses two already existing or newly created companies (SPV 1 and SPV 2) for acquiring the property : SPV 1 acquires an emphyteutic lease (i.e. a right in rem; in French: bail non-tax reasonsor in Dutch erfpachtrecht) on the property, and SPV 2 acquires the “residual rights” on the property.
The split-sale structure was introduced at the turn of this century as a way to mitigate the burden of registration duties on property transactions of a certain size, typically above EUR 2,500,000.
Indeed, whereas a mere straightforward sale of real estate would normally be subject to 12.5% registration duties (if the property is located in the Brussels Region), the split sale allows that:
• SPV 1 acquires the emphyteutic lease at only 0.2% registration duties on the value of the emphyteutic lease (typically 0.2% on a maximum 95% of the value of the property); and
• SPV 2 acquires the residual rights at 12.5% due on a limited value (as the ownership is burdened with the emphyteutic lease).
The total registration duties burden of a split-sale transaction is typically about 1%.
Such split-sale disposal/acquisition structure was generally only carried out for tax reasons (i.e. lowering the total amount of registration duties due). There was therefore an obvious risk that the tax authorities would challenge the transaction and recharacterise it as another type of transaction, typically a straightforward sale of real estate, provided that the taxpayer could not demonstrate that the transaction could be justified by any other legitimate financial or economic needs.
In order to avoid this risk, in a first phase, split-sale transactions were cleared individually by the tax authorities on the basis of an advance tax ruling issued by the Ruling Commission. After an examination of the merits of a case, the Ruling Commission would issue a tax ruling (which is binding for the tax authorities) indicating that the contemplated transaction, based on the description of the applicant, was in order for tax purposes, and could therefore not be recharacterised as another type of transaction.
When the volume of transactions structured in this way became too high, the tax authorities published guidelines on the website of the Belgian Ministry of Finance (November 2006). Such guidelines aimed at setting out the conditions under which the tax authorities allowed a split-sale structure. On that basis, individual rulings were no longer necessary, provided that the conditions of the guidelines were strictly complied with by the parties to the transaction.
Until the Belgian government announced its plans to adopt the new law, split-sales were very popular in the wholesale real estate investment market and it is reported that about 25 % of the transactions were structured in this way.
Compared with a share deal, a split-sale structure offers the benefit of avoiding the transfer of past liabilities to the purchaser without the need to put in place a comprehensive set of representations and warranties as a firewall. Moreover, certain investors were simply not permitted to acquire properties via share deals. The market was of the view that the tax burden of a split sale was acceptable even though, from that perspective, it does not compare to a sale of shares that does not attract any registration duties at all.
Is it really the end of split-sales?
At this point in time, the overall market sentiment is that new property transactions may no longer be structured as split sales and indeed the Ruling Commission, for several months, has put on hold all tax ruling applications relating to split-sale transactions.
Property investors who have acquired properties in Belgium under split-sale structures in the past may legitimately wonder whether the tax administration may challenge such structures as a result of the new law.
As mentioned above, the new anti-fraud provisions apply as from 1 June 2012. Transactions completed before that date can therefore not be challenged by the tax authorities on the basis of the new provisions. The fact that a transaction was performed with an advance tax ruling (i.e. relying exclusively on the guidelines) normally should not matter. Indeed, to the extent the parties to such transaction relied on and consistently applied the point of view of the tax authorities, the same could hardly change its mind and challenge the deal structure.
What about future sales of properties previously acquired under a split-sale structure?
Can the tax benefit of the structure put in place before the new law be preserved when selling the property, at least insofar as the former requirements of the Ruling Commission are satisfied at the level of the acquiring entities?
Clearly the new law will apply to such a transaction. It is worth noting in this respect that the guidelines are no longer on the website of the Ruling Commission, which obviously raises doubts.
We believe that there is therefore a clear risk that the tax authorities use the new anti-abuse provision to challenge such “inherited split sales”. At this early stage of the implementation of the law, it is however too early to take a definitive view. Hopefully, the tax authorities will soon express their point of view on this issue, as uncertainty is a serious hinderance to new transactions.
