Transfer of the family business in corona times

When transferring a family business, you can, when complying with a number of conditions, avoid gift or inheritance tax. One of the conditions is that you ‘uninterruptedly continue’ the business, but this was during the corona crisis not that evident.

Exempt transfer of a family business

A gift from a company is in principle subject to gift tax. And even if a company is part of an estate, inheritance tax is in principle due. That gift or inheritance tax can add up, which could mean that the gifted or heir must sell the company in order to pay the tax.

To avoid this, the three regions introduced a special regime for companies, both in terms of gift tax as well as inheritance tax. In the Flemish Region, there is an exemption from gift tax for the donation of family businesses and companies; if there is no donation, but if the company owner dies, a reduced inheritance tax rate applies.

Exemption from gift tax

In order to benefit from the gift tax exemption, several conditions should be fulfilled at the time of the gift. The exemption only applies to family businesses or family companies. A family business is a business which is exploited or operated by the donator or his spouse or cohabiting partner, whether or not together with others. A family company is a company which is owned by the donator, together with his family.

The exemption only applies to professional goods. A house is always excluded from the exemption.

In case of a company, the donator should hold shares in full ownership which represent at least 50% of the voting rights in the company, or which represent at least 30% of the voting rights in the company when the donator, together with another shareholder, holds shares in full property for at least 70% of the voting rights or he, with two other shareholders holds shares representing at least 90% of the voting rights in the company.

Asset management companies and companies with no real activity are excluded. A company is considered as having no real economic activity when salaries, social charges and pensions (code 62 on the income statement) are maximum 1,5 of the total assets (code 20/58 of the balance sheet), and sites and buildings account for more than 50% of the total assets (code 20/58 of the balance sheet).

There are also several conditions which have to be fulfilled during a period of 3 years after the gift, being:

the activity should be continued uninterruptedly.

the immovable goods of the company which are transferred under the reduced rate cannot substantially be used for habitation.

when a company is concerned, it cannot become a company without a real economic activity and its equity capital cannot decline due to allowances or repayments.

Inheritance tax

For inheritance tax a reduction applies: no exemption. The rate amounts to 3% for a directly descendant heir or partner of the testator. In all other cases the net value of the acquisition is taxed at 7%.

The conditions at the time of decease are more or less the same as those for the gift tax exemption. As with gift tax a number of conditions should be met 3 years after the decease. The same as for gift tax.

Covid-19

Corona has had an impact on the activities of almost all companies. Some entrepreneurs even had to stop their business for a while. Others had to lay off personnel (whether or not under temporary unemployment).

Stopping your activity, even temporarily, interferes with the uninterrupted continuation of the same or similar economic activity. This would mean that the special regime would no longer apply.

Also, by laying off personnel, there is a risk that the company becomes a company without a real economic activity. After all, next to the condition of maximum 50% buildings and sites, salaries, social charges and pensions cannot be lower than or equal to 1,5% of the total assets. This salary charges condition is possibly no longer fulfilled. Do not forget that this condition is checked at the time of the gift or the passing away, so that at that time there can be a problem.

Flemish Minister of Finance, Matthias Diependaele, was interrogated on this point in Flemish Parliament. The Minister answered that the continuation condition cannot be a problem. Even when there is a temporary, mandatory or voluntary closure, the company continues uninterruptedly.

With respect to the salary changes conditions, the Minister indicates that there is a double condition for a company without a real economic activity: the buildings and sites cannot be more than 50% of the total assets, and the salary charges cannot be lower than or equal to 1,5% of the total assets. When the buildings and sites are not more than 50% of the assets, the lower salary charges are no longer an issue.

Only when both conditions are fulfilled, there might be a problem, but even then the Minister states that you still have the possibility to demonstrate that the immovable goods in the company are used for the economic activity and that no private patrimony is concerned. In such case there is still a real economic activity.

Moreover, you can also invoke force majeure.

For directors who want to donate their company in the future, but at the time of the donation, due to corona, do not fulfil the salary charges condition, the same reasoning goes. When both conditions for exclusion are fulfilled, the director can still demonstrate that the immovable goods in the company are no private goods and that they serve the business.

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