For many years, long lease structures (also known as "split-sale" structures) were commonly used to acquire real estate. Because of the lower registration duties due on the acquisition of a long lease, such split-sale transactions led to significant tax savings. After the introduction of a new general anti-avoidance rule in 2012, it was unclear whether this technique would be maintained. In two recently published tax rulings, the Ruling Commission decided that, under certain conditions, split-sale transactions are (still) valid acquisition structures provided that the (future) lessee and the lessor are independent parties. However, with regard to real estate located in Flanders, these will be the last tax rulings. As of 1 January 2015 it is no longer possible to obtain a tax ruling in Flanders because of the transfer of competences concerning the collection and recovery of registration and inheritance duties to the (Flemish) Region.
The long lease ("erfpacht"/"droit d'emphytéose") is often described as the right in rem that gives its holder the most extensive rights in relation to real estate. The combination of these extensive rights with an advantageous tax rate applicable to the registration of long lease contracts (until recently 0.2%, now 2% or 0.5% for non-profit organisations) led to split-sale structures often being preferred over the acquisition of full ownership of real estate. Until recently, the following acquisition structure was often used: a company acquired a long lease right on a real estate property against payment of an up-front fee close to the value of the real estate (e.g. 95% of the value of the real estate), almost immediately followed by the acquisition of the residual rights ("tréfonds") by an affiliated company. Registration duties of 10% or 12.5% on the acquisition of the bare ownership were due on a limited portion of the value because the ownership was burdened with the long lease. As a consequence, split-sale structures considerably reduced the registration duties due by the purchaser(s).
After the introduction of new general anti-avoidance provisions in the Programme Act of 29 March 2012, it was uncertain whether these split-sale structures were still valid acquisition structures. In a circular letter of 10 April 2013, the Federal tax authorities confirmed that such split-sale structures set up between related parties constitute tax abuse. Unless the parties can demonstrate that the use of a split-sale structure is based on considerations other than tax advantages, registration duties due will be calculated as if a straightforward sale of real estate had occurred, and registration duties of 10% or 12.5% will be due on the full value of the real estate (and not on a limited portion of the value), although the registration duties already paid on the registration of the long lease will be deducted.
The Ruling Commission decides that split-sale transactions are still possible
Based on two recently published tax rulings, one can conclude that the Ruling Commission is of the opinion that split-sale transactions are still possible provided that certain conditions are met (advance tax rulings no. 2014.215 and no. 2014.596).
Both tax rulings contain a long list of requirements, engagements and conditions that have to be respected by the contracting parties. The most important of these can be summarised as follows:
- In line with the circular letter of 10 April 2013, the (future) lessee ("erfpachthouder"/"emphytéote") and lessor ("tréfondseigenaar"/"tréfoncier") must be independent parties, and they may not become related parties during the term of the long lease contract.
- Both the long lease contract and the bare ownership must be valued at market value. In both rulings, the Ruling Commission decided that the up-front payment for the long lease, which in both cases was granted for a period of 99 years, may not exceed 92% of the market value of the real estate. In other words, the value attributed to the bare ownership may not be lower than 8% of the market value of the real estate.
- For the duration of the long lease, periodic payments have to be made by the lessee to the lessor in order to ensure that the latter obtains a normal return on investment.
- Under no circumstances may the lessor acquire full ownership of the real estate during the existence of the long lease right. The lessee, however, may acquire full ownership of the real estate, provided that, at the time of acquisition of full ownership, registration duties of 10% or 12.5% are paid on the (full) value of the real estate (notwithstanding the fact that the ownership is burdened with a long lease).
Flemish circular letter on tax avoidance
The Ruling Commission not only specified that also the acquisition of the bare ownership ("tréfonds") must be made with a view to a normal return on investment. It also confirmed that, in principle, split-sale structures do not constitute tax abuse provided that the lessee and the lessor are non-related parties.
The Flemish tax service seems to share this point of view. Following the transfer to the Flemish authorities of the competences regarding collection and recovery of registration and inheritance duties as of 1 January 2015, a new circular letter on tax abuse was issued by the Flemish tax service (circular letter no. 2014/2 of 23 December 2014). In this circular letter, the Flemish tax service enumerates the transactions that are deemed to constitute tax abuse. The structures are essentially the same as the transactions that were already black-listed in the circular letter the Federal tax authorities issued in 2013. As a consequence, the Flemish tax service also considers split-sale structures contracted by related parties as having avoidance of registration duties as their primary goal and therefore, in principle, as constituting tax abuse. However, it should be noted that, where a split-sale structure was used to acquire real estate and the taxpayer cannot demonstrate that he effected the transaction for reasons other than mere tax advantage, registration duties will be due at 10% or 12.5%, and, at first sight, it seems impossible to deduct the registration duties already paid at the Federal level upon registration of the long lease agreement. In our view, it should be possible to receive a tax refund of the federal registration duties already paid on the long lease, as is the case in the Flemish Region where a refund of registration duties paid is possible for transactions which are deemed to constitute VAT abuse.
No Ruling Commission in Flanders, only "explanatory decisions"
Because of the transfer of competences, it will no longer be possible to obtain an advance tax ruling on the application of Flemish inheritance and registration duties. The Federal Ruling Commission is no longer competent to deliver tax rulings on these matters, and the Flemish Minister of Finance has decided not to establish a Flemish Ruling Commission at this time.
As an alternative, the Flemish tax service offers the possibility of requesting an "explanatory decision". However, such a decision does not have the same binding legal value as an advance tax ruling. Moreover, it would only be possible to obtain such decisions for matters which fall under the exclusive power of the Flemish Region. When a taxpayer seeks to obtain legal certainty on a transaction that is partly subject to federal taxes and partly subject to Flemish taxes, it would therefore not be possible to obtain such an explanatory decision. This is, in fact, the case for split-sale structures, which are subject to federal registration duties on the acquisition of the long lease and to Flemish registration duties on the acquisition of the bare ownership.
As from 1 January 2015 it is therefore no longer possible for taxpayers to have legal certainty in advance regarding the tax treatment of proposed split-sale structures for the acquisition of real estate situated in Flanders.