The Flemish Tax Administration initially stated that the period of the more stringent coronavirus measures, was to be considered as force majeure. This was also announced in an online message, published by the Flemish Tax Administration. In this message the Flemish Tax Administration also stated that, as of 3 May 2020 (the end of the period of the more stringent coronavirus measures), it will grant an additional two months in order to comply with the conditions to obtain or maintain favorable tax regimes (for example more time to execute the authentic deed of purchase of a family home in order to benefit from the portability of the registration duties). Currently, a general term extension is granted up to and including 30 September 2020, regardless of whether the original term expires in the period of the more stringent coronavirus measures or only thereafter (e.g. in a period of more flexible coronavirus measures). This date is automatically postponed if the more stringent measures enacted further to the coronavirus crisis remain in force for a longer period of time (for the time being, the Flemish Tax Administration determines 31 July 2020 to be end of the ‘period with more stringent coronavirus measures’). This message from the Flemish tax administration can still be read on its website, but the reference to the notion of force majeure has been removed.
In order to maintain the family business gift tax exemption, the family business activity needs to continue, without interruption, for three years as of the date of the execution of the authentic deed of donation. The condition(s) must therefore continue to be fulfilled over a three-year period and not, ultimately, at the end of a certain period (which is, for example, required for the portability of registration rights). If no explicit regulation is provided for, the Flemish Tax Administration in principle accepts force majeure, aside from the coronavirus crisis, in accordance with the available case law. To consider the coronavirus crisis (and the compulsory closure of a number of companies) as force majeure is, in our opinion, defensible and was, to a certain extent, demonstrated based on the message of the Flemish Tax Administration (which has since been amended). The current situation is however, a special one which has not yet been assessed in case law. In our opinion, it will be necessary to demonstrate that as a result of the strict measures that were enacted further to the coronavirus, the conditions for maintaining the activity could not (or no longer) be met, and that the temporary cessation of the activity was therefore the result of these measures. This should of course be examined and assessed based on concrete facts and on a case-by-case basis. One could also ask whether force majeure could be invoked in case of a voluntary closure that was not imposed by the public authorities. There is currently thus no legal certainty for the taxpayer regarding the qualification of the coronavirus crisis as force majeure.
Irrespective of the continuation of the economic activities, the temporary cessation of economic activity may, on an annual basis, also lead to a reduction in wage costs. These wage costs are one of the two accounting parameters that must also be met for three years after the execution of the authentic deed of donation. Indeed, it is required that the family business pays more than 1.5% in wage costs (calculated in relation to its (consolidated) balance sheet total) if the family business holds at least 50% real estate (also calculated in relation to its (consolidated) balance sheet total). In the event of temporary cessation of activities, it is therefore also important to verify compliance with these accounting parameters. If there is a problem, the question arises whether the message from the Flemish Tax Administration offers solace. This may not be the case as this condition also has to be fulfilled continuously and not ultimately by the end of a certain period (as shown by the examples given in the online message of the Flemish Tax Administration). One could question whether it would not be useful to make a temporary adjustment of these accounting parameters (similar with the measures that were taken during the 2008 financial crisis).
In the Walloon Region, as in the other two regions of Belgium, the transfer by way of a donation of a family business or company qualifies for a reduced donation tax rate of 0%. For the application of this favorable regime, certain conditions must be met on the moment of the authentic deed of donation. In addition, there are retention conditions that must be met during a period of three years after the authentic deed of donation in order to maintain the application of this favorable regime.
These retention conditions can be summarized as follows:
- The enterprise must remain active for at least five years as of the date of the authentic deed of donation;
- The total number of employees must be maintained on an annual average of at least 75% during the first five years, counting as of the date of the authentic deed of donation,
- The capital invested in the company must not decrease as a result of withdrawals or distributions during the first five years following the date of the authentic deed of donation;
- At the end of the five-years period as of the date of the authentic deed of donation, the successors provide a signed declaration that the above conditions are still fulfilled;
- During the five-year period starting as of the date of the authentic act of donation, the successors must provide at the request of the official, designated by the Walloon Government, a written declaration certifying that the above conditions of eligibility for the reduced rate are still met.
Since these conditions must be met continuously during this five-year period starting as of the date of the authentic act of donation, the situation we are currently experiencing raises questions. Due to the coronavirus crisis, certain companies were forced to reduce or temporarily suspend their activities.
Article 140quinquies of the Code on Registration Duties of the Walloon Region stipulates that if the retention conditions are not met, the normal right is payable increased by the legal interest, which is calculated as of the date of registration of the gift. This article also foresees that the reduced rate can thus be maintained if the conditions are not met due to “force majeure”.
There are, in our opinion, good arguments to qualify the coronavirus crisis as force majeure justifying the reduction or temporary suspension of activity. Of course, this has to be analyzed on a case-by-case basis, as some companies were forced by the authorities to temporarily cease their activities, whilst others did so on their own initiative.
In the Brussels-Capital Region, as in the other two regions of Belgium, the transfer by way of donation of a family business or company qualifies for an exemption from donation tax. Certain conditions must be met on the moment of the authentic deed of donation for the application of this favorable regime. In addition, there are retention conditions, which must be met during a period of three years following the authentic deed of donation under the favorable regime in order to maintain the application of this favorable regime.
These retention conditions can be summarized as follows:
- the conditions for the application of the favorable regime must be fulfilled for a period of three years as of the date of the authentic deed of donation;
- the activity of the family company must be continued without interruption for a period of three years as of the date of the authentic deed of donation. For each of the three years, (consolidated) annual accounts must be drawn up and, if applicable, be published;
- the capital may not be reduced by means of allocations or repayments for a period of three years as of the date of the authentic deed of donation;
- the seat of effective management of the company may not be transferred to a State that is not a member of the European Economic Area for a period of three years as of the date of the authentic deed of donation.
In case these retention conditions are not fulfilled any more during this three years period, the normal Belgian donation tax rates will be applicable. No exception in case of non-fulfillment of these retention conditions is foreseen by the Brussels Ordinance, even not in case such non-fulfillment is (solely) due to force majeure.
Moreover, an administrative circular - relating to the favorable regime applicable to the Brussels inheritance tax, which is very similar to the favorable regime applicable to the Brussels gift tax - stipulates that in the event of interruption of the activity due to force majeure, no tolerance is provided by the Ordinance and no exception is made in the event of force majeure, so that the additional duties at the ordinary rates will become applicable, even in case of force majeure.
However, as a result of the coronavirus crisis and the strict measures imposed in that context, many (family) enterprises and companies are involuntarily forced to suspend their activity(ies), which threatens the maintenance of the exemption under the favorable regime.
We have communicated this unfortunate observation to the competent ministerial cabinet of the Brussels-Capital Region, which in the coming days, should examine a series of tax measures in relation to the coronavirus crisis. We will of course keep you informed if measures are taken at the Brussels level to remedy the exclusion from the favorable regime for donations of family enterprises and companies made during the last three years under that regime, when the activity was suspended as a result of the measures imposed in the context of the coronavirus crisis.
If you have any questions on this subject, please contact the authors of this article or via firstname.lastname@example.org.
We assume that this is a family company.