Private real estate doesn't prevent regime for family company

This judgment of the Court of First Instance in Ghent was a first, and is now confirmed by the Court of Appeal in Ghent in an interim judgment of 1 June 2021.

What were the specific facts of the case?

This case concerned a company that, on the basis of the accounting parameters of the Flemish Tax Administration, did not have any real economic activity in order to benefit from the favourable regime. In addition to fields, sheds and a shop, the company also owned an apartment building and a residential house. Vlabel regarded these as private property. Nevertheless, it was abundantly clear that the company was indeed engaged in an economic activity. It ran a butcher’s shop, for which it also bred its own animals.

What does the law say?

The law contains a presumption that no real economic activity exists, and that there is therefore an exclusion from the favourable regime. For this purpose, two parameters must be met in the annual accounts.

• The land and buildings recorded in account 22 of the balance sheet represent more than 50% of the assets.
• Remuneration, social security costs and pensions, balance sheet item 62, do not exceed 1.5% of the total assets.

The law does allow proof to the contrary that the company in question does indeed have a real economic activity.

What does Vlabel say?

In this case, the Flemish Tax Administration refused to apply the favourable regime for family companies. The reason was that the company concerned did not have any real economic activity, based on the accounting parameters.

In a Circular 2015/2, Vlabel further stated that it does not accept evidence to the contrary if private property is also present in the company. According to the Flemish Tax Administration, it can never have been the intention of the legislator to have private real estate fall under the favourable rate.

What does the judge say?

After the taxpayer was proven right in the first instance on 4 February 2020, the Court of Appeal of Ghent now also rules in an interim judgment of 1 June 2021 that the counter evidence has been provided. According to the appeal court, the concept of real economic activity must be understood in its ordinary meaning in the absence of further specification. Nowhere does it say that the fixed assets must be useful for the economic activity. According to the court, it is convincingly demonstrated that there is a real economic activity. Importantly, the court did not exclude real estate activities as an economic activity either.

Real economic activity is the only criterion

As a result of these two court decisions, the position of the Flemish Tax Administration on evidence to the contrary no longer seems tenable. The only criterion is that the company must have a real economic activity. And this can be proven in several ways.

This judgment is not the end of the matter. The appeals court is reopening the debates. It now wishes to verify whether there is any discrimination between family companies and family businesses that hold private real estate. In the latter case, immovable property that is used primarily for residence purposes is excluded from the favourable regime. To be continued.

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