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  Nouvelles règles TVA en matière de facturation et location de moyens de transport
A few weeks ago, we reported on the witch hunt against those tax advisers who engage their clients on the route of the lower taxation.  A practice note of the tax administration is giving us some insight in the tax avoidance schemes which are still acceptable and those that are to be warned against.

This year, Parliament has replaced the general anti-avoidance rule by an anti-abuse rule. What will that change?

To start with, tax avoidance is still allowed. You can still have the right to choose the road of the lower taxation, and if you do, you still have to accept all the consequences of that choice. However, the tax authorities can now stop you from abusing that right. The law calls that 'tax abuse' ; if it was not the intention of the tax law that you structured your affairs in a manner that allows you to pay less tax, the taxman can disregard the road of the lower taxation.  To put it simply : the taxman can tell you that he thinks you have been too clever by half just to save tax.

That does not mean that the taxman can make you pay the tax you thought you had so cleverly avoided. He must give you a chance to explain for reasons you had chosen that road.  It is only if you cannot convince him that the tax saving is just a happy coincidence, that he can ignore your tax planning.

What is new is that this tax abuse rule does not only apply to tax planning for companies but also to tax planning in personal manners, think estate planning, inheritance tax and gift tax. But what does that mean ?

The problem is that we have not even started to see the extent of the grey area of what is acceptable tax avoidance and what is tax abuse, or what sort of motives can justify what looks like abusive tax planning in the first place.  The worst thing is that the taxman does not know either.

Finance Minister Vanackere did not help when he signed a first practice note that remained vague and did not give any examples. He thought that examples would give us the wrong ideas.  Confusion abounded and everyone was asking for some guidance. In the end, the minister relented and on 19 July 2012, a second practice note was issued on the application of the new general anti-abuse provision in the light of the provisions of the Inheritance Tax Code and the Registration Tax Code.

The practice note clarifies that the following estate planning techniques do not constitute abuse.

Hand-to-hand donations, donations in the form of a bank transfer, donations before a foreign (read : Dutch or Swiss) notary.
The hand to hand donation is the perfect solution for passing money, investments and movables. You must not go to a notary to make a hand to hand donation and no gift tax is due.  The only inconvenience is that you must hand over your belongings ; that is accepting all the conditions of the donation (you cannot give your cake and keep it for a rainy day).   It is not even tax avoidance : that is just estate planning that happens to be exempt of gift tax.   And if you live for another three years no inheritance is due. That is why you need some paperwork : to prove the date of the donation.
The donation before a Dutch notary is not different.  You cross the border to get a notarised deed so that the Belgian taxman cannot contest the date of the donation and the starting point of the three year period.
These donations must not be registered in Belgium and, therefore, gift tax (which is a registration tax) is not due. However, because such donations are not liable to Belgian gift tax, they may be liable to inheritance tax together with the donor's estate if he dies within three years.

Donations that are passed before a Belgian notary must be registered, possibly at a reduced gift tax rate, e.g. 3% for donations of movables to children or to your spouse or partner or for the donation of the shares of a family company.
And if you pay gift tax, you do not need to live three years to avoid the inheritance tax.

A donation where the donor retains the usufruct right or another life time right. 
A donation today results in a tax saving compared to the inheritance tax due later. However, many donors want to save on taxes but keep the income from and some form of control over the assets they give.  They can do so by retaining the usufruit and that is confirmed as acceptable tax planning.

A phased donation of real property.
Real property must always be donated before a Belgian notary. However, there are no reduced  gift tax rates ; the gift tax between parents and children on real property is due at rates that are similar to the inheritance tax rates.   These rates are progressive. In Brussels, the first bracket of € 50,000 is taxed at 3 % between parents and children, the next bracket of € 50,000 is taxed at 8 % and the next € 75,000 is taxed at 9 %.  A father can give a share of € 50,000 to each of his four children and gift tax will only be 3 %, and once gift tax has been paid, no inheritance tax is due anymore.  Every donation is calculated starting in the lower tax brackets, but if real property is donated again within three years of a previous donation, the value of the previous donation is added to the value of the present donation to calculate the tax rate.

Fiscally optimised wills where the testator leaves more to a beneficiary who is entitled to a lower tax rate (e.g. the inheritance tax exemption for the family home inherited by the spouse in Flanders).

Generation skipping wills
By appointing all the grandchildren rather than to the children, the parent spreads his estate over more beneficiaries who will each pay inheritance tax on a smaller share of the estate at lower rates. Moreover, by skipping the generation of the children, that generation does not pay inheritance tax.
 However, a variation of that will is deemed abusive. The parent leaves his entire estate to his children with an obligation to acknowledge a debt to the grandchildren, it being understood that debt is not payable by the children until their own death. The estate is spread over more beneficiaries (children and grandchildren), but the grandchildren pay inheritance tax on a discounted value of what they will receive at their own parents' death.

a will made by childless single persons with no descendants.
When the deceased has no partner or children, his estate is inherited by his parents and siblings. The inheritance tax rate is higher for siblings, because the inheritance tax rate between parent(s) and descendants is much lower, it can be worthwhile to make a will where  the individual leaves everything to his parent(s) who can then leave it to his siblings. The estate is inherited twice at the reduced tax rates between parents and children.

a dual legacy (legs en duo / duolegaat)
Charities and foundations pay a low inheritance tax of 7% in Wallonia, 8.8% in Flanders, and 12.5% in Brussels. Distant relatives and friends and pay inheritance tax at rates between 30 and 80 %. In a dual legacy, the will appoints two groups of beneficiaries : the first (the relatives and friends) inherit 'free of inheritance tax' ; the second (the charity) inherits under the obligation to pay the inheritance tax on the entire inheritance, which is tax deductible for calculating the inheritance tax.  This allows for a substantial tax saving. The dual legacy will be acceptable insofar as the charity receives a substantial benefit after paying the inheritance tax.

tontine and 'accruer' clauses;
Contrary to common law where accruer clauses occur in gifts or wills, in civil law (at least in Belgium) accruer clauses are included in the purchase deed where the purchasers buy property as tenants in common, providing that upon the death of one or more of them, his or their shares go to the survivor. The share of the decedent "accrues" to the others, not by will or by the force of the inheritance law, but because of the contractual accruer clause, this allows the purchasers to circumvent the forced heirship rules and avoid the inheritance tax ; usually, the is avoided.

The following schemes are, however, deemed to be abusive. That does, however, only give the tax authorities the chance to question you as to your motives.

Split-purchase schemes (usufruct/bare ownership)
In this scheme the parents buy the usufruct and the children buy the bare ownership of a property. This is tax efficient because the usufruct extinguishes upon the death of the parents ; and the bare owners become full owners while they have only paid the purchase tax on the bare ownership rights.  Article 9 of the inheritance tax code considers this as a disguised donation unless the beneficiaries prove the contrary, i.e. that they were in possession of the cash to pay for the bare ownership.
A popular techniques is to donate money to your children so that they can buy the bare ownership of a property while you buy the usufruit. Will that still be possible ?  If you donate the cash before a Belgian notary and pay 3 % gift tax, I do not see why not. 
However, the practice note considers that this is tax abuse - even if the prior donation was registered and gift tax was paid - if there is unity of intent. If the taxman takes the position that this is abusive tax avoidance, you can still prove that you have other reasons. Maybe you want to protect yourself and your spouse and keep the usufruit : you can live in the property for the rest of your life or let it out and collect the rent if it becomes too big. Moreover, you may not want your children to have access to your money too early, etc ...

Split-purchase schemes (leasehold/freehold)
While the registration tax on the purchase of real property is 12.5 % (10 % in Flanders), the registration tax on a leasehold (bail emphythéotique/erfpacht), is only 0.2 percent. A form of tax planning, therefore, consists in granting a leasehold for a period of between 27 and 99 years to one company, followed by a sale of the freehold to another company.  On the sale of the leasehold, the registration tax is 12.5 or 10 % is due, but it is calculated on a low value.

The practice note states that this is tax abuse if the two companies are related.

This is reminiscent of the position paper published by the Ruling Committee on its website in 2006, which had been retracted at the end of 2011.  A leasehold could be recharacterised where leasehold and freehold are acquired by two related companies if the freehold is not at least 5 % of the value of the property and there is a delay of at least two weeks between the sale of the freehold and the sale of the leasehold.  Even then, the transaction could be acceptable if parties undertook not to reintegrate leasehold and freehold, if the control over the companies did not change for five years and if both companies were run by different individuals.

Death-bed provision in a marriage contract (clause mortuaire/sterfhuisconstructie)
 In a marriage contract, spouse can agree that upon the death of either spouse all the community property will pass to the surviving spouse. Strictly speaking, that is a contractual arrangement that can bypass the forced heirship rules (for joint children), but there is a rule in the inheritance tax code that obliges the surviving spouse to declare half of the community as if it was part of the deceased's estate.  That rule does not, however, apply if the marriage contract provides that it passes to a specific spouse, irrespective of his survival. 
This opens opportunities for last minute estate planning by changing the marriage contract if one of the spouses is terminally ill (hence 'death-bed provision'. In December 2010 the Supreme Court confirmed that this was completely legal, even if one of the spouses had converted personal property into community property. The tax authorities continue to maintain their position, but the practice note is now stating that this is abusive tax avoidance.

Joint donation by both spouses
If spouses do not have a matrimonial regime of community property, one parent may own all the family assets.  A simple tax planning technique is for them to convert their personal property into community property (no gift tax is due) and to do a donation together. For real property, this would mean that the transfer is calculated at the lower gift tax rates twice.  For movables, this would not make much difference as the gift tax rate is fixed, but it might have an effect on the inheritance tax rate.

Mutual donation between spouses
Spouses can split up the family assets equally and mutually donate to each other their own half with the condition subsequent that the donation is undone if the beneficiary dies first. This gives the surviving spouse all the family assets. A reciprocal donation cannot be done with community property. That is why the practice note clarifies that if a couple changes a marriage contract to convert community property and proceeds with such mutual donation, that will be deemed to be a tax abuse.

The practice note clarifies that it does not state that all these situations are definitively either tax abuse or not, but that this depends on the situation and the circumstances.  And even if a transaction is a (potentially) abusive tax avoidance scheme, the taxpayer may still be able to justify it with other non-fiscal motives.

This second practice note is limited to registration tax and inheritance tax examples, another practice note has been announced that will deal with income tax issues.

Marc Quaghebeur
De Broeck Van Laere & Partners
31 July 2012

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