In an earlier Eubelius Flash, we highlighted the fact that the taxman had lost several pilot cases in first instance that are of significant importance for the real estate sector. On 12 February 2019, the Antwerp Court of Appeal delivered two milestone judgments, confirming the position of the taxpayer.
The pilot cases concern approximately twenty files where the taxman considered that the sale of shares in a real estate company (mostly special purpose vehicles) constituted fraudulent and abusive transactions for both VAT purposes and corporate income tax purposes. Consequently, shareholders selling their shares in real estate companies to independent investors were taxed, either on the capital gains realised (on the basis that such gains disguised considerations for project development services), or even on the entire value of the underlying real estate (on the basis that, in reality, the underlying real estate was transferred). Moreover, fines amounting to 200% were imposed on the taxpayers in respect of both income tax and VAT.
Between June 2017 and January 2019, the courts of first instance of Antwerp and Brussels already rendered ten important decisions regarding cases where Eubelius has assisted the selling shareholders. The Antwerp Court of Appeal has now delivered milestone judgments in two of these cases. To our knowledge, this is the first time that a court of appeal in Belgium has ruled on alleged VAT abuse upon the sale of shares of a real estate company. Needless to say, these pilot cases are of significant importance to the entire real estate sector, which considers the sale of companies holding real estate as part of its everyday business activities.
The judgments rendered by the Antwerp Court of Appeal deal with cases where the taxman considered that the sale of the shares in the real estate (development) company constituted VAT abuse. More specifically, the taxman argued that the capital gain realised by the shareholders upon the sale of the shares of the real estate companies concerned constituted a project development fee that the shareholders-project developers did not include in their periodic VAT returns.
After a thorough analysis of the underlying facts and agreements, the Antwerp Court of Appeal confirmed the judgments of the courts in first instance. The Court followed the selling shareholders' defence and ruled that the sale of shares constitutes a normal transaction that is based on valid business reasons. Indeed, the Court stated that the structure criticised by the taxman was not mainly used for VAT avoidance purposes, partly due to the fact that independent counterparties were involved in the real estate project and opted for such a transaction structure. Furthermore, the Court concluded that no purely artificial construction existed, since the real estate company genuinely carried out activities (including entering into the relevant agreements in its own name and on its own behalf, applying for permits and acquiring rights in rem on land). According to the Court, the taxman failed to prove that the real estate company did not bear any risks. In this regard, the Court also rightfully emphasised the following: "A project company in real estate development is a commonly used practice with a view to facilitating and streamlining the application for permits, coordination of the plans and construction works, grouping of risks and liabilities, etc. The acquisition of real estate through the transfer of shares is also a commonly used and economically normal transaction in this respect." The Court of Appeal concluded that the taxman had proved neither abuse, nor fraudulent intent or intent to harm, nor simulation.
Although the taxman's claims have now also been dismissed at the level of the Court of Appeal, these cases clearly demonstrate that the taxman is rigorously and thoroughly investigating real estate development projects, their contractual preparation, set-up and execution, and their economic aspects. It now remains to be seen whether the taxman will persist or will simply throw in the towel with respect to the other pilot cases that are still pending before the courts.
In any case, it is important to remain prudent when structuring and implementing real estate projects. Companies involved in the real estate business must, first of all, ensure that all documents related to any real estate project are carefully drafted, including in the preparatory and bidding phases for public procurement projects and negotiations with non-government investors, in pre-contractual and negotiation phases, in the drafting of – inter alia – memoranda of understanding, financing agreements, share purchase and/or option agreements, project development and building agreements, and in the various stages of the execution of the project and the cash flows related thereto. They should also ensure that the companies concerned act accordingly and in a consistent manner.
Through extensive experience in this area, including representing taxpayers before courts, Eubelius has developed particular expertise in this field. We are therefore happy to assist you with all your queries.