Unsolved tax issues
after 10 years of
practice
Thierry Blockerye
22 November 2005
Table of Contents
1. Corporate income tax issues
1.1. Should corporate tax be included in the taxable basis of
Sicafis ?
1.2. Is the exit tax rate also applicable to regular profits ?
1.3. Avoidance of double economic taxation at the level of
the corporate shareholder of a real estate company to
be merged into a Sicafi
1.4. Differences in the tax treatments available according to
the manner real estate is transferred to Sicafis
1.5. Difficulties generated by the 10% withholding tax on
liquidation bonuses
Unsolved tax issues after 10 years of practice · 22 November 2005
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Table of Contents (cont’d)
2. Transfer tax issues
2.1. General
2.2. Specific issues relating to Sicafis
2.3. Type of rulings obtained by Sicafis
3. VAT issues
3.1. Qualification as a VAT person
3.2. Output VAT regime
3.3. Input VAT regime – management activities
3.4. Sicafis may not act as a professional builders – indirect
consequences
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Table of Contents (cont’d)
4. Tax issues relating to the loss of the tax status
of a Sicafi
4.1. Timing of the loss of status
4.2. Tax value of assets
4.3. Tax composition of equity
4.4. Registration duties
5. Is the present tax status of Sicafis attractive
enough to lead to the development of Sicafis
at an international level ?
6. Conclusions
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1.
Corporate
Income Tax Issues
1. Corporate Tax Issues
1.1. Should corporate tax be included in the
taxable basis of Sicafis ?
Basic taxation principles for Sicafis


Specific tax regime (art. 143 / law of 4 December 1990)
Subject to corporate tax but has a very limited taxable basis




Received abnormal and benevolent advantages
Disallowed expenses (regional taxes !)
Secret commissions tax
Rate of taxation



33.99% (standard rate)
309% (secret commission tax)
16.995% (not really applicable to Sicafis but rather applicable to
companies which will be recognised as Sicafis or which will be merged
into Sicafis)
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1.1. Corporate tax to be included in the
taxable basis of Sicafis ?
Basic taxation principles for Sicafis (cont’d)

Corporate tax stricto senso should be added to the taxable
basis






Tax on tax effect: the effective rate is increased up to 51.49%
Perverse effect, not conform to “ratio legis”
Logical for standard companies but not for Sicafis
Same issue for Belgian Coordination Centres
Last case law: decisions unfavourable
de lege ferenda: this issue should be solved in tax law
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1.2. Is the exit tax rate also applicable to
regular profits ?




The recognition of a real estate company as a Sicafi
(or as a merger into a Sicafi) is a deemed fiscal liquidation
A liquidation implies a distribution of all assets at fair
market value and hence triggers a taxation of the latent
gains and the tax-free reserves
Reduced rate of 16.995% justified by the anticipation of a
taxable event
Taxable basis of the latent gains has now been addressed
by a circular (24 December 2004)

Value of the property, transfer taxes excluded
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1.2. Is the exit tax rate also applicable to
regular profits ?

Does the exit tax rate also apply to regular profits ?

Text argument:
– Exit tax rate is applicable to the taxable amounts in the framework of a
transaction provided in article 210 §1, 5° of ITC (article 216)

This issue should be addressed in the tax law
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1.3. Avoidance of double economic taxation
at the level of the corporate shareholder



After the recognition or the merger into a Sicafi, the
corporate shareholder no longer benefits from the
participation exemption regime
The recognition or the merger into a Sicafi is only deemed
a liquidation for tax purposes, not for accounting purposes
Impossible to operate a taxable step-up of the participation
in the accounts of the corporate shareholder with the risk
of having a double economic taxation on the embedded
gain of the participation
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1.3. Avoidance of double economic taxation
at the level of the corporate shareholder




Solution accepted by the Minister of Finance
(private rulings)
Tax revaluation in the tax return of the corporate
shareholder
Declaration of a taxable reserve
(underestimation of the tax value), taxable as a dividend
(95% participation exemption)
Amount of the taxable reserve equals to the difference
between the fair market value of the company and the tax
value of the participation
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1.3. Avoidance of double economic taxation
at the level of the corporate shareholder

Market value of the company:


Second solution is more logical:


The real estate company is subject to exit tax only on the
difference between the value taxes excluded and the tax value
(Circ. 23 December 2004) and therefore there is only an issue of
double economic taxation on the basis of the value tax excluded
De lege ferenda:


Should one take into account the value all-in of the underlying real
estate or the value taxes excluded ?
This solution should be provided in the tax law
Other solutions to avoid the double economic taxation:


Sale of the participation in the real estate company prior to its
recognition as a Sicafi or its merger with a Sicafi
Tax aggressive ?
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1.4. Differences in the tax treatments available according to
the manner real estate is transferred to Sicafis

General parallelism between mergers, splits, partial splits,
contributions of universality, contributions of branches of
activities:


Possibility to have a taxable transaction or a tax exempt
transaction
Above parallelism not applicable to Sicafis:

Exit tax only in the case of:
– Mergers
– Splits
– Partial Splits


Differences in the tax treatments are not really justifiable
Limited impact in practice since mergers constitute the
preferred way of transfer
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1.5. Difficulties generated by the 10% withholding
tax on liquidation bonuses



Tax issue more present for individual shareholders than for
corporate shareholders
(which may benefit from a range of exemptions)
If due by the corporate shareholder, tax credit
(and reimbursement possibility)
within the limits of article 282 of the ITC
(no reduction in value and 1-year uninterrupted holding
period)
When applicable, withholding tax triggers cash flow
problems as the remuneration in mergers consists only in
the form of shares
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1.5. Difficulties generated by the 10% withholding
tax on liquidation bonuses

Possible solutions:




Withholding tax (WHT) is supported by the real estate company
and the debt is taken into account when determining the number
of Sicafi shares to be issued
Partial remuneration in cash, corresponding to the withholding
tax to be paid
Agreement with the promotor – bank
Ways to avoid the issue:

Sale of the participation in the real estate company to the Sicafi
and wait for 1 year
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2. Transfer Tax
Issues
2. Transfer tax issues
2.1. General

A wide variety of real estate transfers are exempt from
transfer taxes






Contribution of property
Contributions of a branch of activity / universality
Mergers / absorptions
Classic splits
Up to a certain extent, partial splits (! “Mixed” contributions !)
Different tools available to the tax authorities in order to
reclassify an operation or a series of operations into a
taxable transaction



Simple requalification
Sham / simulation
Requalification by virtue of art. 18 RDC
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2.1. General (cont’d)

Possibility to ask for rulings
Informal rulings
(demande de perception / aanvraag tot perceptie)
 Formal rulings

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2.2. Specific issues relating to Sicafis

Contribution of real estate assets
followed by the sale of the shares
issued by the Sicafi




Typically the transaction will be subject to scrutiny by the
tax authorities
Rulings obtained in the framework of Sicafi IPOs
Simulation (sham) impossible
if parties accept the legal consequences of the transactions
put in place
Requalification only possible
if the requalified transaction provides the same economic
consequences as the operations presented by the parties
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2.2. Specific Issues related to Sicafis (cont’d)

Acquisition of 100% of the shares in a real
estate company immediately followed by a
merger into a Sicafi
Less frequent way of transfer than in the past
 Simulation (sham) impossible if parties accept the
legal consequences of the sale / merger
 Requalification in our view very difficult

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2.3. Type of ruling obtained by Sicafi

Formal rulings

When launching an IPO of a Sicafi
– Contributions of property followed by the sale of shares
– Contributions of property (with the benefit of the tax
exemption) before actual recognition by the CBFA

Informal rulings

Consolidation of the full ownership of property
– Leasehold transferred in the framework of a merger
– Freehold transferred in the framework of a contribution
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3. VAT issues
3. VAT issues
3.1. Qualification as a VAT person

Art. 4 of VAT Code: Sicafi qualifies as a VAT person
3.2. Output VAT regime



According to art 44, §3, 11° of the VAT Code, operations
carried out by Sicafis are tax exempt
Not to be interpreted too restrictively
Sicafis may perform VATable transactions, e.g.:





Real estate VAT leasing
Rent of parking spaces
Rent of warehouses
Provide services ancillary to real estate renting
Sale of full ownership / right in rem of a «new» building for VAT
purposes
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3.3. Input VAT regime




No VAT deduction for exempt activities
VAT deduction for taxable activities
Quid applicable ratio for the deduction ?
Quid services relating to the management of Sicafis



Position of the tax authorities:
only for duties imposed by the law or CBFA
VAT exemption not applicable to advisors, auditors, real
estate appraisers, …
Position could be reviewed in the future as management is a
concept of European Law (case law pending), and the
implementation of EC Directive Units III which further defines
the notion of management
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3.4. Sicafis may not act as professional
builders


Inadequate assimilaton between professional
developers and professional builders
Consequences:




automatic self-supply in case of merger of a professional
constructor company with a Sicafi
Necessity to opt in order to have a sale / granting of rights in
rem with VAT
No impact of sale / granting of rights in rem on deduction
prorata
Prefinancing of VAT in case of the erection of new buildings
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4. Tax issues
relating to the loss
of the Sicafi status
4. Tax issues relating to the loss of the
Sicafi status

Loss of the Sicafi status can be voluntary or as a
result of a penalty imposed by CBFA
4.1. Importance of the timing of the loss


Retroactivity for the whole accounting period
or not
Practical solution:

to operate a hard closing before asking the withdrawal of
the recognition
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4.2. Tax value of real estate assets
and basis for depreciation

In our view, certain revaluation surpluses
cannot be depreciated from a tax point of view :



Revaluation surpluses accounted for the difference
between the value all taxes included and all taxes
excluded
Revaluation surpluses accounted after the transfer into
a Sicafi in order to reflect an increase in value
Planning possibilities ?
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4.3. Tax composition of equity




Paid-in capital
Taxable reserves
Untaxed revaluation surpluses (see 4.2)
In principle, no other realised tax-free
reserves
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4.4. Registration duties

Recapture of stamp duties when exemption
granted on basis of art. 122, al. 1, 4° of
RDC
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5. Is the present tax
status of the Sicafi
attractive enough to
be developed
internationally ?
5. Is the present status of the Sicafi attractive
enough to be developed internationally ?

Positive points
Subject to corporate tax, even with limited taxable
basis, and hence application of the OECD double
taxation treaties
 Exit tax
 Transfer tax exemptions
 Interest income not taxable
(including those relating to loans granted to
subsidiaires)
 Combination possible with similar foreign tax-free
entities (French SIIC regime)

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5. Is the present status of the Sicafi attractive
enough to be developed internationally ?

Negative points
Still some unclear tax issues
 No consolidation for Belgian subsidiaries
 Taxation of income from real estate certificates
(liquidation coupon)
 Taxation of dividends

– Nearly impossible to avoid Belgian WHT for individuals /
institutions
– Corporate shareholders are taxed on the dividends and
future capital gains in their country of residence
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6. Conclusion
6. Conclusion
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34
Unsolved tax
issues after 10
years of practice
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