|
Marc Quaghebeur, of Vandendijk & Partners, explains why a Belgian Region could be a popular destination for retiring entrepreneurs from across Europe, for inheritance tax purposes.
 Marc Quaghebeur
Inadvertently, the Region of Flanders in Belgium is positioning itself as a retirement haven for retired entrepreneurs from all over Europe. In reaction to a decision of the European Court of Justice, Flanders has changed its inheritance tax legislation so that these businessmen can come and live in Flanders and save on inheritance tax on their estate. Inheritance tax in BelgiumBelgian is a federal state that has seen its political power segregated on three different levels: the federal government, the communities and the regions. Each level has different political powers and different powers to levy taxes. To start with inheritance tax was a federal tax, but after two constitutional reforms, it has become a regional tax. The three regions, the Flemish and the Walloon region and the region of Brussels Capital, have used these powers to modulate the inheritance tax rates and to introduce tax exemptions. Gradually we have come to a situation where different rules – and in particular different rates – apply in each region. One of the areas where the regions have used their powers was to introduce inheritance tax exemptions for the transfer of shares of a family business or company.
Such exemptions are not gratuitous: the authorities want to promote the continuity of their enterprises, to safeguard employment on their territory and to stop their entrepreneurs from setting up legal constructions, mainly abroad, to get around the inheritance tax, by making them redundant. The Flemish region, which is mostly the north of the country, has a zero rate for the shares of a family company located within the European Union. A family company is defined as a company controlled for more than 50 percent by one family. One of the conditions, however, was that the company must have employed at least five full-time workers in the Flemish region of Belgium in the past three years. And that proved to be a discrimination that infringes the EC Treaty. Mr Vogten was a Dutch entrepreneur who held shares in two companies in the Netherlands. He was living across the border, in Belgium and when he died at an early age, his wife and son were denied the inheritance tax exemption for his participations. The companies in question did, indeed, employ more than five full-time workers but not in the Flemish region. The Vogtens appealed and the European Court of Justice found that the Flemish inheritance tax rules indirectly discriminate between taxpayers on the basis of the place of employment of a certain number of workers in a certain period (Decision C-464/05, Geurts and Vogten of 25 October 2007).
Within two months, the Flemish Parliament has adapted its legislation, but the new rules allow Flanders to position itself as the retirement haven for entrepreneurs. The new rulesThe Flemish Parliament has adapted the employment condition. The obligatory employment in Flanders is replaced by an employment obligation in the European Economic Area. The EEA includes all EU Member States as well as Iceland, Liechtenstein and Norway. At the same time, the criterion for calculating the level of employment is simplified. Instead of counting full-time employees, which could create problems for certain types of industry, the new criterion is a sufficient remuneration level in the three years before the entrepreneur’s death. During the last three years before his death, his company must have paid remuneration charges of €167,000 in average. And the company must maintain the same average remuneration level during the next five years. Conditions for the inheritance tax exemption for family companiesThe term ‘family company’ may be misleading. For the shares of a family company to be exempt of inheritance tax all that is required is that the entrepreneur has held a 50 per cent participation in an EU company with a sufficient employment level in the EEA. The only criterion that makes a company a family company is that the family of the entrepreneur must have held more than 50 per cent of the shares of the company without interruption for the last three years before his death. To qualify for the inheritance tax exemption, the entrepreneur must - be domiciled in Flanders;
- have held, together with his family, at least 50 percent in a company
- that is established in the European Union,
- that has staff in the European Economic Area with an average salary cost of €500,000 during the last three years (that level must be maintained for five years),
- that drafts annual accounts in accordance with the Belgian rules (that is attached to the company’s income tax return) or in accordance with the legislation of the country where the company is established; and
- of course, the heirs must have declared the participation in the inheritance tax return.
To be exempt from Flemish inheritance tax, the entrepreneur must be domiciled in Flanders. If he has lived in another region of Belgium before his death, he must have been a tax resident in the Flemish region for the major part of the last five years before his death. In practice, this will normally mean he must have been a tax resident in Flanders for the past three tax years. If he arrived in Flanders coming from another country, there is no minimum duration, not even to comply with the following condition. For the last three years before his death the entrepreneur and his family must have held, without interruption, a participation of at least 50 percent in the company. What is taken into account is not only the entrepreneur’s own participation, but also that held by his/her spouse, children and children-in-law, parents (and their spouses), brothers and sisters (or their spouses), and the children of brothers and sisters that have died before the entrepreneur. The fact that a company has been involved in a merger or demerger, an exchange of shares or any other corporate transaction, is disregarded as long as the entrepreneur has complied with the conditions both before and after the transaction. The company must be established within the European Union. The law does not impose any limitation as to its activity, contrary to that of an unincorporated family business that is limited to industry, trade, craft, or agriculture or even as a liberal profession. A participation of over 50 per cent in a holding company that holds shares in – or receivables against – one or more subsidiaries that meet the conditions qualifies for the exemption as well. However, in that case the degree of participation is calculated on a consolidated basis while the minimum employment level is calculated per company. Over the last three years before the entrepreneur’s death, the company must have employed staff in the European Economic Area. The EEA includes all EU Member States as well as Iceland, Liechtenstein and Norway. The criterion is not the number of employees anymore, but the total remuneration charge (including salaries, fringe benefits, social security contributions) for staff employed in the EEA, these remuneration charges must be in excess of € 500,000 during the last twelve quarters; Moreover, the company must maintain the same remuneration level during the five years after his death. In the 20 quarters following his death, the company must pay 167 per cent of the remuneration charges paid in the three years before the entrepreneur’s death.
Remuneration paid to domestic staff that is mainly employed in the household of the deceased entrepreneur or in that of a director, liquidator or a person with a similar function in the family company is to be disregarded. The remuneration paid to the deceased entrepreneur or his spouse, descendants or ancestors can be taken into account, but only for the first €300,000 in remuneration charges before death, and for the first €500,000 in respect of remuneration charges after death. If the company meets these conditions, the entrepreneur’s heirs will be entitled to an exemption of inheritance tax on the shares in the company held by the entrepreneur as well as for the receivables against the company. If the minimum remuneration levels are not met, the inheritance tax will be due proportionally. ConclusionA businessman who wants to get around the inheritance tax on an estate consisting mostly of a participation in a family company can do so in Flanders without giving up control over his estate. He can organise the transfer of the shares of the company while keeping control and continue to chair the board of directors. And when he passes away, he can leave the shares to his children, or to anyone else for that matter, without any inheritance tax liability, fully legally and without setting up any creative constructions for tax purposes. An entrepreneur, who holds a smaller participation in a company, can opt to hold that participation via a family holding company. A company holding over 50 per cent participation in a holding company that itself holds shares in or receivables against one or more companies that meet the conditions qualify for the exemption as well.
|
