Belgium – Investing in real estate: Recent changes and trends
The Belgian real estate market is facing several recent changes – mainly relating to taxation and town-planning matters – and we have noticed new trends, as in other European countries, relating to real estate and project financing. We briefly summarise these changes and trends below.
Real estate acquisition and financing structuring
New anti-abuse provision. In a nutshell, the new anti-abuse provision allows the tax administration, in the case of tax abuse, to disregard a legal act (or a series of legal acts constituting one and the same transaction from an economic standpoint) and, where appropriate, to re-classify such a transaction. What amounts to tax abuse is to be understood in the context of European case law, and in particular the Cadbury Schweppes case. Tax abuse is composed of two cumulative elements: an objective criterion, being the inconsistency with the aims of the law and the intention of the legislator, and a subjective criterion, being the essential (but not necessarily the sole) tax motive of the taxpayer. Contrary to comments in the preparatory parliamentary works and in the administrative circular, we are of the opinion that both elements must be demonstrated by the tax administration – and not merely the objective element. Accordingly, the Belgian Ruling Commission should have the authority to rule on both elements – and not only on the subjective element.
For registration duties (transfer tax) and inheritance taxes, this new measure applies to deeds executed since 1st June 2012. The same provision applies to (corporate) income tax but its entry-into-force differs: it applies to all transactions performed as of tax year 2013 (accounting year ending 31/12/2012 or in 2013 but before 31/12/2013) and during tax year 2012 if the corresponding accounting year was still open 6 April 2012 (even if it ended on), being the publication date of this new measure.
Contrary to neighbouring states, Belgium applies quite high transfer taxes to asset deals (full ownership and usufruct) while precarious rights in rem and leases are subject to low rates and share deals are exempt. Taking into account this new measure, the key issue is now to determine what is still possible in terms of tax structuring of real estate transactions.
- Black list. The only transaction officially blacklisted is the so-called ‘split deal’ (i.e. the acquisition of all right in rem pertaining to a real estate asset by related companies via an acquisition of the long-term lease right and the residual property rights). We are, nevertheless, of the opinion that the disposal of former split deals is not targeted and, therefore, disinvestment through asset deals can still be contemplated.
- White list (?). To date no white list or policy notes from the Ruling Commission have been made available. We, however, believe the following structures are not considered as tax abuse provided all ‘non-tax’ conditions and formalities are met: share deals, including single asset and development, but with an assessment on a case-by-case basis for share deals done shortly after the real estate has been isolated in a company; long-term lease rights (emphytéose/erfpacht) including ‘lease-back’ or similar financing transactions, even if a first substantial instalment is paid; split deals between third parties where the residual property rights are sold to a third party investor (e.g. pension fund, insurance company) who wants to secure a fixed and (nearly) risk-free return. In the two last scenarios, one can envisage granting an option to the long-term lease holder, exercisable upon the transfer of the long-term lease right, and subject to payment of a market price. When implementing these structures, one must also consider the financing aspects (e.g. debt push-down and restrictions on financial assistance for share deals, tripartite agreements for asset deals).
This new anti-abuse provision is of a general nature and, therefore, does not just apply to acquisition structuring. In particular, financing schemes should be carefully reviewed.
New thin capitalisation rule. The former 7/1 thin capitalisation rule, which applied to interest paid to beneficial owners who are not subject to tax or who benefit from a tax regime on this interest which is more favourable than the Belgian regime (‘tainted loans’), is restated to a 5/1 thin capitalisation rule and extended to all intra-group financing. This is still quite favourable if compared to neighbouring states. It applies as of 1st July 2012.
The equity component is equal to (i) the taxed reserves (i.e. legal reserve, profits brought-forward and all other available reserves) at the beginning of the taxable period plus (ii) the fiscal capital (i.e. share capital plus share premiums and sums contributed for the issuance of profit sharing certificates, if there are any). Losses carried-forward should be booked at 0 meaning that a company can lend-on 5 times its capital whatever its accounting result is. This method of computation is favourable for the real estate sector as it discounts the negative impact of yearly depreciation taken on assets. The debt component consists of (i) all intra-group loans and (ii) the former ‘tainted loans’.
The interest on intra-group (or tainted) loans in excess of this ratio is not deductible. The ratio must, therefore, be carefully monitored. Indeed, the equity component is determined once a year on the closing date, and any increase of capital that takes place just before the closing date is also taken into account (subject to the general anti-abuse provision). If the debt component is lower than 5 times the equity component throughout the taxable period, this deductibility restriction does not apply. On the other, if the debt component has exceeded 5 times the equity component during this period, then the debt component (and the corresponding interest) must be assessed on a daily basis.
The new rule provides for a series of exclusions or exceptions that can be summarised as follows:
- Loans made following a public issue of bonds (or similar securities) or by credit institutions (and certain assimilated institutions) are excluded from the thin cap. Based on the strict drafting of the legal provision, it is doubtful that the anti-channelling provision permits re-categorising a credit institution loan as an intra-group loan because it is secured by a group company.
- Loans granted to companies participating in a public-private partnership under public procurement provisions, are excluded from the thin cap.
- Loans (i) granted to regulated leasing companies (movable leasing) and companies active in leasing (immovable leasing) and factoring within the financial sector and (ii) related to those activities, are excluded from the thin cap. The reference to the ‘finance sector’ should limit the scope of the exclusion to companies belonging to a regulated group (e.g. banking or insurance sector).
- For treasury centres, the computation of the ratio is made on a net basis (at P&L level) with respect to their cash-pooling activities which conform to a cash-pooling agreement. However, interest received from group corporations which are not subject to tax or benefit from a tax regime on this interest which is more favourable than that in Belgium (with a carve-out for Member States) is not taken into account to determine the balance.
Under an anti-channelling provision, a third-party financing provider or guarantor is deemed to be the beneficial owner of the interest, for the application of the thin capitalisation rule, if tax evasion is the main objective of the transaction.
When structuring the financing of a transaction, one must keep in mind the general deductibility rules, and especially the fact that only ‘arm’s length’ interest, taking into account the characteristics of the loan and the financial situation of the debtor, is deductible.
With respect to equity financing of real estate assets (not shares), the company always benefits from a 2.742% notional interest deduction (NID). As of tax year 2013, the unused deduction cannot be carried-forward anymore and the carry-forward of existing NID stock is now limited in time and amount.
Real estate taxation
European case law. On 25 October 2012, Belgium was judged by the European Court of Justice to be applying a discriminatory tax regime towards foreign investment companies In a nutshell, movable income (interest and dividend) paid to Belgian investment companies are either exempt from withholding tax or subject to a withholding tax that is fully creditable against the company’s corporate income tax. As investment companies are formally subject to tax, but on a reduced taxable basis, this withholding tax is nearly always reimbursed in full. For foreign investment companies without a Belgian establishment, however, this withholding tax is a final taxation in Belgium. The European Court of Justice held that this tax regime was not compatible with the free movement of capital and with the freedom of establishment. The decision of the ECJ is noteworthy in several respects:
- interest and dividends are treated in the same way, which was not the case in previous decisions;
- the ECJ did not examine whether a tax credit was available in the state of residence, while it did in previous judgements related to dividend withholding tax;
- the ECJ rejected the Belgian State’s request to put a time-limit on the consequences of this judgement. All interested parties should review their positions and determine whether they can rely upon this judgement and whether they are still within the statute of limitations to claim back the Belgian withholding tax.
Investments in Belgium, whether as an investor or a creditor, should be assessed in the light of this ECJ decision.
Taxation of investors. The latest tax reforms fixed the standard dividend withholding tax rate at 25%, although the most significant exemptions, i.e. the extension of the Parent-Subsidiary Directive to treaty countries and the exemption for foreign charities and pension funds (subject to conditions) remained unchanged. The following information should be highlighted:
- distributions made by residential REITs will benefit from a reduced 15% withholding tax rate (while previously, they benefited from an exemption). The definition of ‘residential REIT’ is also restated: these REITs must now invest 80% of their assets in residential real estate (including old people’s homes) located in the EEA;
- the Ruling Commission recently confirmed that a US REIT benefit from an exemption from dividend withholding tax under the provisions of the Belgium-US Tax Treaty.
Taxation of creditors. The interest withholding tax rate has also been fixed at 25% apart from a small number of exceptions. The most important of these and recent trends are as follows:
- interest paid between Belgian companies (and not to all companies residents of Member States); a few years ago the ECJ did not find this regime contrary to EU law without, however, addressing the question of the existence of a tax credit in the state of residence. EU taxpayers continue to dispute that position before Belgian courts and the possibility of a modification of the ECJ case law, in this respect, cannot be excluded;
- interest paid to credit institutions established in Belgium, in the EEA or in a treaty country; it must be noted that this exemption only benefits credit institutions, and that not all ‘investment banks’ fall within this definition; a case-by-case assessment is recommended;
- interest paid to ‘related companies’ in the sense of the European Interest-Royalty Directive as (favourably) implemented in Belgian tax law; it must be noted that French SASs are not listed in the annex to this directive and, therefore, cannot benefit from this withholding tax exemption;
- interest paid on registered bonds subscribed by certain non-residents; in this type of financing arrangement, the civil law features of bonds and the rights of the bondholders must be observed in order not to jeopardise their being qualified as registered bonds and losing the related withholding tax exemption.
Belgium has also entered into tax treaties that provide for an exemption of withholding tax on interest (sometimes subject to conditions) (e.g. Luxembourg, Germany, the Netherlands, the United States of America): the most recent is the Protocol amending the tax treaty with the United Kingdom.
As in other countries, we see a marked trend for insurance companies and pension funds to enter the real estate financing market. Mostly due to regulatory constraints, they structure their financings through bonds for which they should benefit from a withholding tax exemption provided that all conditions are met. One must, however, note that:
- as a rule, Belgian insurance companies (and Belgian branches of foreign insurance companies) benefit from a withholding tax exemption on the interest they receive; this exemption does not apply to EU/EEA insurance companies and could as a consequence be held to be contrary to European law;
- Belgian pension funds benefit from the same tax regime as Belgian investment companies; based on the same rationale, foreign pension funds should be able to rely upon the aforementioned ECJ decision.
Some major town-planning reforms are in the pipe-line in the Brussels Capital Region.
Granting building permits. One part of the Belgian government agreement dd. 1st December 2011 relates to the administrative simplification and the efficiency of the Brussels institutions. In this context, the Brussels Capital Region will undergo major changes in the near future. One of them concerns the extension of the Brussels Capital Region’s competences to the detriment of the municipalities. To date, building permits have been primarily granted by the municipalities. Brussels Capital Region is competent for a restricted list of cases, e.g. building permits applied for by public legal bodies, building permits relating to public works or a listed property,…). The reform will extend the Brussels Capital Region’s competence to cover the grant of all building permits subject to an environmental impact assessment. This notion includes both “étude d’incidence/effectenstudie” and “rapport d’incidence/effectenverslag”. In the Brussels Capital Region, numerous projects are subject to such environmental impact assessments. in the future, therefore, the Brussels Capital Region will be competent in numerous cases, e.g. the construction of a garage with at least 25 parking spaces, the construction of an office building with at least 5,000 m², all mixed projects, i.e. that require both environmental and building permits,…
To date, the Brussels Capital Regional has not yet adopted any decree. This should happen within the coming months.
Modification of the Regional Land Use Plan – Demographic Regional Land Use Plan. Pursuant to a decree dd. 11st January 2011, the Brussels Capital Region has decided to modify the Regional Land Use Plan (“Plan Régional d’Affectation du Sol”-”PRAS”/”Gewestelijk Bestemmingsplan”-“GBP”) . The main purpose of the changes is to meet the anticipated increase in the population of the Brussels Capital Region over the next ten years. This is also why such modification is referred to as Demographic Regional Land Use Plan (“PRAS Démographique”/”Demografisch GBP”). In a nutshell, according to the Demographic Regional Land Use Plan, it will be easier to implant housing in areas that have not been (principally) dedicated to housing so far. Two prime examples:
- Creation of an new area: the enterprise area in urban environment (“zone d’entreprise en milieu urbain”-“ZEMU”/”ondernemingsgebieden in de stedelijke omgeving”-“OGSO”). According to the Demographic Regional Land Use Plan some of the current industrial areas will be converted into business areas in an urban environment. In this area, several uses will be permitted, i.e. business to business activities, retail, public amenities and housing. Therefore, in the near future, housing will be permitted in current industrial areas where housing is currently excluded
- Modification of the administrative area (“zone administrative”/”administratiegebied”). To date, housing is permitted in an administrative zone as a secondary use, i.e. where the local plan does not prohibit it. According to the Demographic Regional Land Use Plan, housing will be a main function of the administrative area. Therefore, in the near future a local plan will not be able to prohibit housing in an administrative area.
The public inquiry ended in July 2012, and the final adoption of the Demographic Region Land Use Plan should take place in the coming months.
Adoption of the Demographic Regional Land Use Plan is quite important for the real estate sector as this new plan will shortly open up previously restricted areas for new housing real estate projects.