Residential real estate under the new preferential tax regime: does VLABEL opt for the gross sale value?

While the initial focus was primarily on the question of what exactly should be understood by "residential real estate", today it is mainly the valuation of such real estate that is giving rise to debate. VLABEL's recent FAQ and a subsequent response to a question of interpretation raise fundamental questions about how the decree should be applied.

1. What has changed and why?

With the reform, the Flemish legislator sought to prevent residential real estate from continuing to benefit fully from the preferential tax regime when transferred through a family-owned company. The intention was clear: the tax benefit should be reserved for business assets and not for private real estate that happens to be held by a company.

The new decree therefore provides that the preferential tax regime only applies to the portion of the value of the shares that does not relate to residential real estate. The portion of the share value attributable to residential real estate is excluded from the preferential tax regime.

In certain exceptional cases, the value of residential real estate nevertheless falls within the preferential tax regime. 

2. What does the decree say?

The decree provides that a statutory auditor or certified accountant must prepare a valuation report indicating the extent to which the value of the residential real estate is reflected in the value of the company's shares.

This wording is significant.

The Flemish legislator does not refer to the value of the residential real estate as such, but to the portion of the value of the shares that relates to that real estate. This seems to imply that the expert must carry out an economic valuation analysis to determine the value that the residential real estate actually represents within the total share value.

This valuation exercise, apart from the additional costs and administrative obligations it entails, appears relatively clear.

3. First signs: VLABEL's position in the FAQ

In its FAQ, VLABEL clarified that the gross sale value of the residential real estate must be used to calculate the excluded portion. According to VLABEL, any financing or mortgage debt specifically relating to that real estate is not taken into account.

At first sight, this approach appears strict. Nevertheless, it can be understood to a certain extent. Allowing debts to be deducted, regardless of their nature, could create opportunities for tax optimisation.

The Flemish legislator therefore sought to prevent debts from being deducted on a one-to-one basis from the value of the residential real estate. However, in doing so, the legislator opted to treat all debts in the same way and not to allow any deduction.

The FAQ nevertheless still left some room for interpretation. It could still be argued that VLABEL regarded the gross sale value merely as a starting point within the overall valuation of the shares.

4. The response to the question of interpretation: all nuance disappears

That room for interpretation now appears to have disappeared.

In a recent response to a question of interpretation, VLABEL expressly confirms that the underlying residential real estate is excluded at its full (sale) value. According to the tax administration, the preferential tax regime is calculated by reducing the value of the transfer by the gross sale value of the residential real estate.

VLABEL states its position particularly clearly:

"In essence, the (underlying) residential real estate is excluded at its (sale) value. The preferential tax regime can (only) apply to the residual value, being the difference between the (sale) value of the transfer and the (sale) value of the underlying residential real estate. If the (sale) value of the residential real estate exceeds the (sale) value of the transfer, no preferential treatment can be granted.**"

A company whose shares were valued at EUR 100,000 owns a residential apartment with a sale value of EUR 350,000. The apartment is still subject to a mortgage loan of EUR 250,000, meaning that, economically, the residential real estate represents a net value of only EUR 100,000 within the company. VLABEL was asked to what extent the transfer of the shares could still qualify for the preferential tax regime.

VLABEL's response leaves little room for interpretation. According to the tax administration, it is not the net economic value of the residential real estate or its impact on the share value that is decisive, but rather the full sale value of the underlying residential real estate. According to VLABEL, the preferential tax regime can only apply to the "residual value", being the difference between the sale value of the shares and the sale value of the residential real estate.

Since, in this example, the sale value of the residential real estate (EUR 350,000) exceeds the value of the shares (EUR 100,000), VLABEL concludes that "no preferential treatment can be granted". The entire transfer is therefore taxed at the ordinary rate.

5. Is this interpretation still consistent with the legislator's intention?

This raises fundamental questions.

First, the tax administration's interpretation appears difficult to reconcile with the wording of the decree. After all, the decree refers to the portion of the value of the shares that relates to residential real estate, rather than to the gross sale value of the residential real estate as such.

This also raises the question of what purpose the mandatory valuation report still serves.

If the calculation ultimately consists solely of comparing the value of the shares, on the one hand, with the gross sale value of the residential real estate, on the other, the valuation exercise imposed by the Flemish legislator appears to lose much of its significance. Why should a statutory auditor or certified accountant still be required to determine the extent to which the residential real estate is reflected in the share value if, according to VLABEL, this impact ultimately proves irrelevant to the calculation?

Finally, there is also a valuation issue. The shares are valued taking into account both assets and liabilities, whereas, according to VLABEL, the residential real estate is taken into account solely at its gross sale value. As a result, two values determined using different valuation methodologies are being compared.

6. Practical consequences?

VLABEL's interpretation may have a significant impact on family-owned companies that hold residential real estate in addition to carrying out their economic activities.

In certain cases, there may even be little point in relying on the preferential tax regime where the gross sale value of the residential real estate approaches or exceeds the value of the shares. In that case, the tax administration's interpretation means that the entire transfer is subject to the ordinary gift or inheritance tax rate. This is a remarkable consequence for a preferential tax regime that is specifically intended to safeguard the continuity of family businesses.

Moreover, this approach may result in companies with genuine economic activities being entirely excluded from the preferential tax regime simply because they hold residential real estate that has been financed largely or even entirely with borrowed funds. The economic reality of the company thus appears to become secondary to the mere gross sale value of the residential real estate.

Conclusion

The reform of the preferential tax regime for family-owned companies was intended to exclude residential real estate from the tax benefit. There is little debate about that policy choice.

VLABEL's recent interpretation, however, shifts the debate to another level. The tax administration expressly opts for a system in which the gross sale value of the residential real estate determines the exclusion, irrespective of how that real estate is financed or how this is reflected in the share value.

This raises fundamental questions about the relationship between administrative practice and the wording of the decree. More specifically, it is questionable whether this interpretation remains consistent with the statutory reference to the portion of the value of the shares that relates to residential real estate. Moreover, the tax administration's approach appears to largely undermine the purpose of the mandatory valuation report.

The final word on this debate therefore does not appear to have been said. It cannot be ruled out that the courts will ultimately have to determine whether VLABEL's interpretation is compatible with both the letter and the purpose of the decree.