After the implementation of the new, Federal, tax abuse provision, the Administrative Circular 8/2012 officially blacklisted the so-called “split deal” transaction, whereby a real estate asset is purchased through the simultaneous acquisition of (i) a long-term lease right or leasehold and (ii) the residual property rights or freehold over the same asset, by related parties. In this specific situation, the leasehold can since then be disregarded and the transfer of the freehold can be subject to real estate transfer tax (RETT) computed on the market value of full ownership of the real estate, unless the taxpayer can demonstrate that its motives were other than fiscal ones to justify the structuring.
In the light of this, what is still permitted ?
Transfer of an existing “split deal”
Case 1: Transfer by way of an asset deal which preserves the split
In principle, the transfer in asset deal of an existing split structure, to two different companies (even if they are related), is not subject to the general anti-abuse rule since the acquiring companies were not involved in the set-up of the first split. The leasehold and the freehold have their own regime based on their respective deed of transfer, and the existing split structure is, therefore, maintained as it was initially created. The fact that the acquiring companies are related, is not relevant in the case at hand. One point needing attention, however, is the allocation of values between the leasehold and the freehold. The transfer of the freehold is indeed subject to RETT computed on the higher of the agreed value or the market value. To avoid any discussion with the tax authorities in this respect, having an external valuation report in support of the allocated values, is highly recommended.
Case 2: Transfer by way of an asset deal, unifying the existing rights in rem over the asset
The leasehold and the freehold are sold to the same purchaser, resulting in the reunification of the rights in rem over the asset in the hands of the same entity. Same recommendation as above: the allocation of values between the leasehold and the freehold should be supported by external valuation report(s).
In our view, one cannot speak of tax abuse in such a case, since the purchaser did not participate in the initial split structure and the two separate asset deals (i.e. on leasehold and on freehold) follow their own tax regime, as provided by law, on the basis of their respective deed of transfer.
Where is the problem, then ? In the former policy of the Ruling Commission: “split deals” were allowed and granted positive tax rulings provided a series of commitments were given, incl. the absence of reunification of the full ownership over the asset, except if the purchaser pays RETT on the full ownership value.
Taxpayers involved, as sellers or purchasers, in transaction implying reunification of the full ownership over a real estate asset, should seek a new ruling, confirming that the former commitment is waived, and also confirming that the transfers of the leasehold and freehold are subject to resp. 2% RETT and 10 or 12.50% RETT (instead of 10 or 12.50% on the entire asset value). In a recent decision, the Ruling Commission confirmed this tax treatment, pointing out the absence of call option or drag-along provision in the initial deed and thus the absence of another alternative to a transfer which would reunify the full ownership. It should, however, be noted that the selling companies were unrelated and that such structures are still under discussion at the Ruling Commission.
Granting a leasehold right
The granting a leasehold right to an unrelated company while the initial owner keeps the freehold, remains a common and safe practice when it complies with all legal characteristics of a leasehold. In terms of remuneration, the following should be kept in mind:
- The law on leaseholds requires a yearly instalment to be paid to the owner of the freehold. From a legal standpoint, it prevents the leaseholder from claiming that it has acquired the property right over the freehold from the owner under the statute of limitation since the yearly instalment amounts to a yearly acknowledgement of the quality of owner.
- The law does not, however, require these yearly instalments to be equal. A first substantial instalment, set by reference to the value of the underlying asset and to the duration of the leasehold, based on an independent valuation report, can be envisaged.
- The subsequent periodic instalments are then set, taking into account this first instalment, but also providing the owner with a market return
The new “split deal”
The Ruling Commission has ruled in favour of a new “split deal” between unrelated parties and subject to the following conditions and commitments.
- The transferee of the leasehold and the purchaser of the freehold must be unrelated parties.
- The value of the freehold (costs excluded) should amount to at least 8% of the market value of the real estate asset in full ownership, and the leasehold must have a duration of 99 years.
- In terms of remuneration, a substantial first instalment ranging from 89% to 92% of the market value of the real estate asset in full ownership is allowed; subsequent periodic instalments should range from 4% to 7% of the freehold’s value.
- The purchaser of the freehold must also undertake not to apply for the status of a “merchant of goods” and not be involved in the financing of residential properties by individuals.
The absence of reunification of the full ownership is again an issue; it is, however, specified that a leaseholder and future transferee can benefit from a call option subject to RETT becoming due on the full ownership value upon exercise.
Call option and tax abuse
As mentioned above, the Ruling Commission seems to accept the principle of a call option, which could lead to the reconstitution of the full ownership of a real estate asset, although RETT, at a rate of 10 or 12.50% of the full property value would be payable.
Such tax treatment is not based on any specific legal provision and should, therefore, be interpreted as an application of the general anti-abuse rule. We believe, however, there should be no tax abuse, if at least the following conditions are met:
- The beneficiary of the call option is each transferee of the leasehold right, provided that he is neither related to the transferor nor to the owner of the freehold;
- The call option can be exercised as from the 28th year following the grant of the leasehold so as to comply with the minimum legal term of a leasehold; and
- The exercise price should correspond to the market value of the freehold, substantiated by external valuation report(s).
