Vlabel too strict for property companies without justification

What were the facts associated with this case?

Two children inherited shares in a holding company from their mother. This holding company owns 99.98% of the shares of a subsidiary company whose main activity is the exploitation of residential and professional property.

In the declaration of inheritance, the children requested that the reduced rate of 3% inheritance tax be applied to the shares of the holding company because it holds shares of an active subsidiary company. Vlabel refused because, according to the tax authorities, the condition of a trading activity at the subsidiary company was not quite met. According to Vlabel, it involved a property company, which is excluded from the favourable regime.

Legislation concerning family partnerships

Inheritance and gift taxation applies a favourable regime for family businesses, i.e. companies whose purpose or activity involves exercising an industrial, commercial, artisanal or agricultural activity or independent profession. Simply put, the favourable regime only applies to companies that engage in an actual economic activity. However, the legislator did not specifically define this concept of actual economic activity.

The decree does include a presumption that no actual economic activity exists if two parameters are cumulatively met in the annual accounts:

1. The land and buildings included in balance sheet item 22 exceed 50% of the total assets.
2. The remunerations, social contributions and pensions in balance sheet item 62 do not exceed 1.5% of the total assets.

This presumption is rebuttable. It is consequently possible to submit a rebuttal stating that the company does engage in an actual economic activity even if the two parameters are met.

Vlabel’s strict interpretation

Vlabel was previously unsuccessful with this strict approach in the Court of Appeal in Ghent on 1 June 2021. Find out more in our article entitled ’Private property does not impede favourable regime for family businesses’. At that time it involved a company which managed an active butcher’s shop and private homes. The Court ruled that these private residences did not preclude the company from engaging in economic activity.

A year later the Court once again considered Vlabel's interpretation. This time it involved a company that was exclusively engaged in property related activities. According to Vlabel, the company’s property activities were not an actual economic activity. The court ruled against Vlabel.

Concept of actual economic activity

According to the Court, the concept of actual economic activity must be interpreted in its regular meaning, which implies that there is no reason to exclude the company in question from the favourable regime. Indeed, as a project developer and professional manager of a property portfolio, the company engaged in activities that go beyond purely passive property management. The Court was of the opinion that the fact that the company encompassed a lot of property but no workforce, is not a reason to exclude the company from the favourable regime.

Importance of the judgement

It is the second time in a year that the Court of Appeal in Ghent has reprimanded Vlabel for its excessively strict application of the favourable regime for family businesses.

The judgement is a welcome reprimand of the tax authorities and is entirely in line with the decree. It also provides companies with property on their balance sheet with planning opportunities. Nevertheless, the question remains as to what exactly is the distinction between purely passive and not purely passive property management. Indeed, according to the Court, the former should be excluded from the favourable regime, but the latter should not.

Do you have further questions about this issue, or would you like advice concerning your personal situation? If so, please do not hesitate to contact our Estate Planning team. They will be happy to assist.

If you would like to find out more about property taxation, our e-book entitled ‘Finding your way in property taxation’ may be of interest. It has recently been updated.