Flanders introduces new rules on the tax free transfer of family businesses

The Flemish Government has recently introduced a Project Act concerning the 2012 budget with the Flemish Parliament. This Project Act also includes new tax measures on the transfer of family businesses.

The Flemish economical landscape essentially consists of family businesses, often quite flourishing and investing in innovative products. The Flemish Government therefore wishes to further preserve and stimulate these businesses. A couple of years ago, the Flemish legislator already implemented various beneficial tax measures on the transfer of family businesses, such as a beneficial registration duty for donations and even an exemption of inheritance duties.

Evaluating the existing rules, and noticing that the pater familias often hesitated too long before taking effective measures, the Flemish Government wants to stimulate a more active transfer of these family businesses. To do so, the Government decided to change fiscal tactics and provide for an exemption of registration duties on donations and a reduced rate of 3% of inheritance taxes for spouses and cohabitants. The inheritance tax rate equals 7% for all other persons. As a result, the pater familias from now on has a stronger interest in planning his succession in time, in order to save inheritance taxes for his relatives and enjoy a tax free transfer of his business by virtue of a donation before his death.

In order to simplify the application of both tax measures, the legislator decided to apply the same conditions for the tax free registration of donations and the reduced inheritance tax rate:

1. Qualifying assets

The beneficial tax measures relate to "family undertakings" and to "family companies".

Family undertakings

A "family undertaking" is a business whereby the pater familias himself or his partner operates the business. To qualify as such family undertaking, the business must conduct an "industrial, commercial, craft or agricultural" activity or a "liberal profession".

All assets professionally invested in the undertaking can benefit from the above mentioned measures, except for immovable property mainly used or intended for housing.

Family companies

A company qualifies as a "family company" if the pater familias and/or his family hold at least 50% of the shares in the company. One of the new provisions is that also companies held by two or three (different) families can benefit from the exemption or reduced rate. When the pater familias, together with one (or two) other non-related shareholder(s), holds 70% (or 90% ) of the shares, it suffices that the pater familias himself only holds 30% (instead of 50%) of the shares.

In order to qualify, the company must be conducting an "industrial, commercial, craft or agricultural" activity or a "liberal profession". As a result, estate companies and management companies are excluded from the beneficial regime.

Holding companies on the other hand, can qualify if they hold directly at least 50% of the shares in a subsidiary that does conduct a qualifying activity. The exemption or reduced rate will in that case be applied on a pro rata basis.

One can regret that the new tax rules only apply to holdings directly participating in a qualifying subsidiary, since indirect participations are not taken into account. It may seem that this condition neglects the often more complex structures of (the larger) family businesses.

Also, In case of family companies, the beneficial tax measures only relate to the shares of the company. Other participation rights or claims on the company cannot benefit from the beneficial regime.

2. Preservation condition

The family business must continue its activity without interruption for a period of at least three years after the donation or the decease.

In case of family undertakings, the immovable property included in the undertaking may also not be used or intended for housing during this three year period. Family companies on the other hand may not reduce their capital, nor transfer their effective place of management outside the EEA within that time frame.

3. Formal conditions

In order to qualify for the exemption or the reduced rate, the donation or declaration of inheritance must explicitly state that they wish to apply the exemption or reduced rate. Furthermore, an attestation needs to be provided, which can be requested with the Flemish tax authorities whereby they confirm that all conditions are met.

It is also important to note that the new regime does not impose any remuneration requirements anymore.

One of the (or maybe even the) most important changes relates to the so-called "suspicious period". Non registered donations that have occurred during this "suspicious" period, which is in principle three years, are not opposable to the tax legislator and will therefore still be subject to inheritance taxes. The Project Act now provides that the transfer of family businesses and undertakings is subject to a seven years "suspicious" period (instead of the normal period of three years) for the levying of inheritance taxes. The Flemish Government clearly wants to further encourage the timely registration before a Notary Public and stimulate the pater familias undertake specific measures and action for the transfer of his business.

It is clear that these new measures are a good incentive for the economy in general and for family businesses in particular. The new rules also contribute to a higher fiscal certainty and transparency. On the other hand, a more general tax free transfer of all businesses and enterprises certainly would have represented an even stronger signal by the Government that Flanders wants to keep as many as possible industrial, commercial and financial activities within its borders.