The Real Estate Investment Structure Taxation Review: Belgium
i Investment vehicles in real estate
The most used unregulated corporate vehicles for real estate investments are the public limited liability company (SA or NV), the limited liability company (SRL or BV) and the limited partnership (SComm or CommV). The limited partnership is the most flexible vehicle from a corporate law standpoint and is not subject to capital protection rules. It also facilitates the setting up of the collateral in the context of acquisitions (share deals) financed by bank loans.
Regulated vehicles are the Belgian specialised real estate investment fund (SREIF) (FIIS or GVBF), which is an institutional fund, and the Belgian real estate investment trust (REIT) (BE-REIT) (SIR or GVV), which is a listed vehicle.
For an institutional investor, the choice between an unregulated vehicle or a BE-REIT depends on its own status and on the characteristics of the transaction.
ii Property taxes
Acquisition and disposal
Share deals are not subject to transfer tax, stamp duty or VAT, unless the tax administration demonstrates an abuse (to have the transaction subject to the same tax regime as for an asset deal).
Asset deals are subject to either transfer tax or VAT. When the real estate qualifies as a new building for VAT purposes, the transfer of a property right may (when the owner is not a professional developer and opts for a VAT taxable transaction) or must (when the owner is a professional developer) be subject to 21 per cent VAT. A building is deemed new for VAT purposes until 31 December of the second year following its first use or occupancy. Heavy refurbishment allows for qualification as a new building when either:
- a drastic modification of essential elements, being the nature, structure or destination, whatever the costs of the works might be, is executed; or
- modifications are executed for which the cost of the works (excluding VAT) is equal to at least 60 per cent of the market value of the building (excluding ground) at the end of the works.
When VAT does not apply, the purchase of an asset or the granting of usufruct is subject to 12 per cent (in Flanders) or 12.5 per cent (in Brussels and Wallonia) transfer tax computed on the higher of the agreed price or the market value. Long-term lease rights and rights to build are subject to 2 per cent transfer tax computed on the total of the fees paid to the owner over the full duration of the right increased by the charges contractually borne by the beneficiary.
Unregulated vehicles, as well as Belgian establishments of foreign investors in the case of direct acquisition of real estate assets, are subject to corporate income tax (CIT). The net revenues, after depreciations and tax-deductible expenses, are subject to 25 per cent CIT. In the case of a direct acquisition by a foreign investor, no profit branch tax applies. Capital gains realised upon disposal are subject to 25 per cent CIT, subject to a rollover regime in the case of reinvestment of the price in qualifying assets.
The tax burden differs for regulated vehicles. Entering into such a vehicle (e.g., by conversion of a regulated vehicle) triggers exit tax – the taxation of the latent gain on the asset at a rate of 15 per cent. Going forward, investment proceeds will not be subject to CIT, but taxation will be shifted to the investors via a compulsory yearly dividend distribution, which will trigger withholding tax based on the applicable tax treaty.
Asset deals versus share deals
i Legal framework
Transactions are executed via acquisition of shares, acquisition of ownership or acquisition of a 99-year long-term lease right.
- Asset deal: an investor can acquire the full ownership, a long-term lease or usufruct over a real estate asset. Such acquisition must be performed by notarial deed and transcribed to the mortgage register to be made enforceable towards third parties.
- Share deal: in a share transaction, the purchaser should acquire the shares of a special purpose vehicle and at the same time inherit all assets and (hidden) liabilities of the company. Extensive due diligence is therefore required upon acquisition. The share transaction takes the form of a private agreement and the inscription of the transfer in the share register. No notarial deed is required. Belgian law does not know the concept of a real estate company (a company whose main assets consist of real estate and which would be treated, mainly for tax purposes, differently from an ordinary company). Consequently, the tax regime applicable to share transactions is not subject to deviating rules.
Foreign investors can acquire real estate assets directly without being required to incorporate a local acquisition company.
These types of acquisition are common practice, but their consequences from a taxation and accounting standpoint require case-by-case analysis.
ii Corporate forms and corporate tax framework
It is common practice for investors to set up a company for each real estate investment. This allows them to ring-fence their investment and facilitates future exits.
The most used unregulated corporate forms for Belgian real estate companies are:
- the SA or NV (public limited liability company);
- the SRL or BV (limited liability company); and
- the SComm or CommV (limited partnership – this type of vehicle is not subject to capital protection rules, including the prohibition of financial assistance).
The most flexible vehicle is the SComm or CommV; however, it requires two types of shareholders: the general partner and the limited partner(s), the general partner having unlimited liability for the debts of the SComm or CommV. The SA or NV and SRL or BV can have one shareholder whose liability is limited to its contribution to the company.
Belgian unregulated vehicles are subject to CIT; the same applies to Belgian establishments consisting of Belgian real estate owned directly by foreign companies. The main characteristics under the current state of the law are summarised below.
The statutory CIT rate for tax year (TY) 2023 (financial year 2022) is 25 per cent.
As a rule, accounting law (Belgian generally accepted accounting principles (GAAP)) governs corporate tax treatment, unless the tax law departs from it. The taxable base therefore consists primarily of the accounting results for the corresponding financial year, to which are added:
- the dividends distributed;
- the disallowed expenses (i.e., accounting expenses that are not (fully) deductible for tax purposes as listed by tax law); and
- the transfer pricing adjustments.
In accordance with Belgian GAAP and confirmed by specific tax rules, a matching principle applies. Accordingly, costs related to, for example, a contract, such as a credit facility, are to be spread (and therefore deducted) over the duration of this contract.
The negative tax result shall be transferred to the company's carried-forward tax losses. These tax losses can be carried forward without any time limitation but are subject to a yearly limitation on use, as given below:
- no limitation up to €1 million of taxable income; and
- 70 per cent of taxable income above €1 million.
The acquisition price of a real estate asset, increased by the ancillary acquisition cost, is recorded as a fixed asset. This fixed asset, ground excluded, is depreciable over 20 to 33 years depending on the underlying type of asset (e.g., logistics, office or retail). Such depreciation is a tax-deductible expense. The same applies to capital expenditure, it being understood that the depreciation period could be shorter depending on lifetime.
Most relevant tax-deductible costs
Apart from depreciation, the most relevant tax-deductible costs are:
- maintenance and repair costs to the extent that they qualify as operating expenses;
- only accruals and provisions corresponding to either a contractual obligation (agreed upon during the taxable period or a preceding period) or a legal or regulatory obligation (other than deriving from accounting law);
- financing costs (e.g., at-arm's-length interest paid on (mortgage) loans);
- at-arm's-length fees stemming from the real estate, such as asset management fees and letting fees; and
- property taxes.
Most relevant disallowed expenses
The most relevant disallowed expenses are:
- the CIT due;
- the regional taxes (e.g., tax applying on non-residential surfaces located in the Brussels-Capital Region); and
- financing costs that are:
- not at arm's length; or
- above the 30 per cent earnings before interest, taxes, depreciation and amortisation (EBITDA) threshold.
Interest borne to maintain or acquire taxable income is tax deductible subject to the limitations set out below.
Intragroup loan interest is deductible for CIT purposes to the extent that the loan provides for market conditions. Belgian tax laws do not provide for standard ratios (e.g., loan to value or interest service coverage ratio) to be complied with regarding the financial position of the debtor, nor does it provide for a standard at-arm's-length interest rate.
Net borrowing costs (financing expenses less financing income) of a taxpayer will be deductible only up to the highest of 30 per cent of the (taxable) EBITDA of the target company or €3 million, subject to group provisions.
The thin capitalisation rule providing for a 5:1 debt-to-equity ratio still applies:
- in respect of interest payments made to beneficial owners that are either not subject to income tax or subject to income tax on this interest income but are significantly more advantageous than the Belgian common tax regime (i.e., tainted loans); and
- in respect of interest that benefits from the grandfathering clause under the above EBITDA limitation.
Tax consolidation – intragroup transfer
Since TY 2020, Belgian parent and subsidiary companies or Belgian sister companies (i.e., qualifying taxpayers) are allowed to transfer tax losses of the year between them, allowing profit-making companies to offset their taxable base against the transferred tax losses, through an intragroup transfer agreement.
Qualifying taxpayers are Belgian companies and foreign companies established in the European Economic Area (EEA) that meet the requirement of a minimum 90 per cent capital affiliation – namely, a direct participation of at least 90 per cent or both companies are held for at least 90 per cent by a common Belgian or EEA parent. The companies concerned must have been affiliated during an uninterrupted period of five taxable periods, including the taxable period concerned, and have the same financial year starting date and either the same financial year end date as the Belgian taxpayer or an earlier end date because of liquidation.
Subject to the specific case of termination of activities, the intragroup transfer is also allowed only between Belgian taxpayers – namely, Belgian companies and Belgian establishments of foreign companies established in the EEA. In other words, when it is referred to a foreign company, the transfer occurs with its Belgian establishment.
Tax consolidation shall be achieved through the transfer of losses of the year between Belgian taxpayers of the same group in accordance with an agreement specifying the conditions for the intragroup transfer (e.g., the Belgian taxpayer must pay to the qualifying taxpayer compensation corresponding to the tax saving resulting from the intragroup transfer).
Transfer pricing adjustments
The Belgian tax authorities handle transfer pricing issues as abnormal or benevolent advantages.
When a company receives an abnormal or benevolent advantage from a related party at variance with the arm's-length principle, no loss or deduction can be offset against this advantage. This rule applies to payments received (e.g., excessive interest or fee received or part of the sale price received in excess of the arm's-length price) but also on savings (e.g., interest saved because of an interest-free loan). Abnormal or benevolent advantages received will therefore always constitute the minimum taxable base of the beneficiary. This minimum taxable base gives rise to an effective cash-out, being equal to the amount of the advantage received multiplied by the applicable CIT rate. The received advantage, consisting of a saving, shall increase the carried-forward tax losses.
A company granting an abnormal or benevolent advantage in breach of the arm's-length principle must add this advantage (e.g., excessive interest or fee paid) to its taxable income, but only to the extent that this advantage has not been taken into account in determining the Belgian recipient's taxable income.
Occupational agreements (e.g., commercial or office leases) are subject to a 0.2 per cent registration duty, calculated on the aggregate lease terms increased by the charges that are contractually borne by the lessee (these charges are generally estimated to be between 5 per cent and 10 per cent of the aggregate lease terms).
As a rule, the renting out of (commercial) real estate is not subject to VAT, with, as a consequence, an absence of right to deduct the input VAT. However, exceptions or special regimes apply for:
- shopping centres;
- parking spaces;
- VAT leases pertaining to new buildings;
- rights in rem on new buildings;
- provision of hotel accommodation; and
- granting of the right to perform a professional activity.
Since 1 January 2019, an optional regime to subject commercial leases to VAT has been available. Under commercial lease, the letting of the premises is exclusively used by the tenant for its economic activity, granting such a tenant the quality of a VAT taxable person (even without the right to deduct input VAT). This option is subject to the following conditions:
- the letting must concern a new building (or part thereof), meaning buildings for which VAT on construction or refurbishment cost has become chargeable for the first time on 1 October 2018 at the earliest;
- the option must be agreed upon by both landlord and tenant; and
- the option must be valid for the entire duration of the lease.
This option allows the landlord to deduct input VAT on the construction or refurbishment cost but shall, at the same time, extend the VAT clawback period to 25 years.
iii Direct investment in real estate
CIT in the hands of the seller
Capital gains realised on Belgian real estate are, as a rule, subject to CIT at a rate of 25 per cent in Belgium. This taxable capital gain can, however, be offset with tax-deductible costs or carry-forward losses.
Under certain conditions, however, the seller may benefit from a tax deferral regime. The conditions for benefiting from this rollover relief are:
- the asset on which the capital gain is realised must have been booked as a fixed asset for at least five years at the time the asset is sold;
- the taxpayer must reinvest the sale price in depreciable assets used in Belgium for business purposes; and
- the reinvestment must occur within a three-year period, which can be extended by two supplementary years if the reinvestment consists of a building, plane or boat.
In such cases, the taxation of the capital gain is spread out over the depreciation period of the newly acquired assets.
CIT in the hands of the purchaser
On acquisition, the assets will be booked in the hands of the purchaser for their acquisition value plus the acquisition costs. In other words, the purchaser will benefit from a stepped-up basis and will be able to depreciate these assets (land excluded) from their market value.
Foreign companies investing directly in Belgian real estate
According to the Belgian Model Tax Treaty, which follows the OECD Model Tax Treaty in this respect, the right to tax income from (the transfer of) immovable property belongs to the state in which the property producing such income is located. Non-resident entities are subject to non-resident income taxation, which is levied on their Belgian source income resulting from the transfer or the renting of a real estate asset located in Belgium.
No profit branch tax applies on the net repatriated income from the Belgian real estate.
The sale of real estate in full ownership (or the sale of residual property rights) and the granting of usufruct are subject to 12 per cent (Flemish Region) or 12.5 per cent (Brussels-Capital and Walloon Region) transfer taxes unless VAT applies. The taxable base equals the acquisition value of the real estate or its fair market value, whichever is higher.
Long-term lease rights are subject to 2 per cent registration duties computed on the aggregate of the lease terms for the entire duration of the right plus the costs to be borne by the long-term lessee, unless VAT applies. Transfers of such long-term lease rights are subject to the same registration duties computed on the lease terms and costs still due until termination of the right increased by the consideration paid to the transferor.
As a rule, the acquisition or granting of property rights over Belgian real estate is not subject to VAT but is subject to transfer taxes. This means that the seller will not have to charge any VAT to the purchaser, but it will also not be able to deduct the input VAT, if any, paid upon construction (or acquisition) of the real estate. However, the acquisition or granting of property rights over Belgian real estate qualifying as a new building for VAT purposes may or must be subject to VAT instead of transfer taxes.
- New building: only the purchase of (or granting of a property right over) a building (with adjacent land) that qualifies as new for VAT purposes can be subject to VAT. A building will be deemed new for Belgian VAT purposes until 31 December of the second year following that of its first occupancy or appropriation. Heavy refurbishment allows for qualification as a new building for VAT purposes if the refurbishment affects the essential elements (nature, structure or purpose) of the building. If there is doubt regarding such essential elements, the VAT authorities accept that the refurbished building is considered new for VAT purposes whenever the cost price of the refurbishing (not counting VAT) amounts to at least 60 per cent of the sale value of the building (not counting land) after refurbishment.
- Status of the supplier: in the case of a new building, whether the transfer can be performed under VAT depends on the status of the supplier. If the supplier is a professional constructor, the transfer must be subject to VAT. A professional constructor is a person who regularly transfers, for a price, new buildings or rights in rem on new buildings that they have built or acquired subject to VAT, before expiry of the period during which the building is considered new. In other cases, the transferor can opt to subject the transfer to VAT.
The registration of a mortgage as well as the transfer of a mortgage, further to the transfer for consideration of the mortgage-backed receivable or loan, is subject to a 1 per cent registration duty and 0.3 per cent mortgage fee. Certain transfers are exempt. Other securities, such as mortgage mandate, pledge of receivables and bank account, are not subject to those taxes, except for a documentary tax of €0.15. The registration of a pledge of movable assets triggers a registration fee of €500.
A pledge of shares can have adverse tax consequences. This is because pledged shares are, as a rule, not considered when determining the thresholds to be met in respect of dividend and interest withholding tax exemptions. However, the Belgian Ruling Commission has confirmed that this rule does not apply to pledges that exclude the transfer of ownership rights (e.g., voting rights).
iv Acquisition of shares in a real estate company
CIT in the hands of the seller
When selling shares in a Belgian company whose (main) assets are in real estate, the realised capital gain on shares should benefit from an exemption from CIT in Belgium. This tax advantage for the seller often leads to the granting of a discount for deferred tax liability when computing the share price in accordance with the market standard formula net equity of the company minus net book value of the real estate asset plus agreed value of the real estate asset minus discount for deferred tax liability, which usually corresponds to 12.5 per cent (50 per cent of the currently applicable CIT rate) of the positive difference between agreed value of the real estate asset and net book value of the real estate asset.
CIT in the hands of the purchaser
Upon the acquisition, the share deal does not have tax consequences as such in the hands of the purchaser.
CIT in the hands of the target company
Article 207 of the Income Tax Code (ITC) must be kept in mind, which provides for unavailability of the tax deductions carried forward (e.g., tax losses and notional interest deduction) in the case of a change of control of a Belgian company. There are no fixed guidelines in respect of real estate acquisitions in the form of a share deal. Therefore, the further availability of tax deductions must be assessed on a case-by-case basis, it being understood that in most cases the transfer occurs on a going-concern basis and therefore does not trigger Article 207 ITC.
A share deal is not subject to transfer taxes or stamp duty, even if the sole or main asset of the target company whose shares are sold consists of real estate. A share deal is not subject to VAT.
Belgian general anti-abuse rules
Unlike numerous countries, Belgium does not assimilate the sale of shares in companies whose main assets consist of real estate with the sale of real estate for both CIT and registration duty purposes. Consequently, a share deal on an unregulated real estate company will not trigger any adverse tax consequences: no registration duties, no VAT, no stamp duty and no taxation of the latent capital gain on the real estate asset.
The question raised is whether the general anti-abuse rules (GAAR) would allow the re-characterisation of a share deal into an asset deal, and consequently would lead to CIT being due on the latent capital gains and to registration duties being due on the real estate asset value.
In accordance with European case law, the preparatory parliamentary works of the Belgian GAAR and the administrative guidelines provide that tax abuse includes two components:
- an objective component: the contrariety of the aims of a legal provision to the intention of the legislator. The taxpayer chooses a particular structuring that is perfectly legal, although the aims of the tax law and the intention of the legislator were not to promote this type of structuring. In short, the taxpayer uses a structure that allows it either to fall outside the scope of a legal taxing provision or to fall inside the scope of a legal exempting provision, although those legal provisions were not made for it; and
- a subjective component: the essential goal of the taxpayer when choosing this structuring is to obtain a tax advantage.
Accordingly, this GAAR requires that the Belgian tax administration demonstrates a tax abuse, the first component being an objective element – namely, the contradiction with the aim or the objectives of the legislator. In this regard, the Belgian legislator has always, repeatedly and without any doubt, expressed its will (1) not to assimilate shares of a real estate company to the real estate asset and (2) to exempt share deals at the CIT as well as for registration duties purposes. On this basis, share deals should generally not be in contradiction with the aim or the objectives of the legislator, meaning that the objective element of the tax abuse is not present.
Regulated real estate investment vehicles
i Regulatory framework
SREIFs are subject to the Law of 19 April 2014 relating to alternative investment funds and their managers (the AIFM Law), Program Law II of 3 August 2016 (the SREIF Law) and the Royal Decree of 9 November 2016 relating to specialised real estate investment funds (the SREIF Decree).
SREIFs are aimed at providing asset managers and institutional investors with a flexible and efficient fund vehicle for their real estate investments in Belgium and abroad.
Overview of available legal forms
A SREIF is a closed-end fund with fixed capital and must be structured as a corporation (the available corporate forms are the SA or NV and the SComm or CommV).
AIFM Law and AIF qualification
A SREIF is an alternative investment fund (AIF) that falls under one of the following categories.
- First category: the fund raises capital from a certain number of investors, without public issue, with a view to investing them in real estate in accordance with an investment policy in the interest of the investors. The fund is an AIF in the sense of the Alternative Investment Fund Managers Directive (AIFM Directive) and has opted for investment in real estate. In such a case, the AIFM Law fully applies to the fund and its managers, it being understood that a light regulatory regime is available for a small AIF when the assets under management do not exceed €100 million (with leverage) or €500 million (without leverage and without right to reimbursement within five years as from the initial investment).
- Second category: the fund is not an AIF in the sense of the AIFM Directive because either (1) it does not fall within its scope of application or benefits from an exemption or (2) it is owned by one single investor or constitutes a joint venture. In such a case, the fund opts for AIF status in the sense of the AIFM Law and limits its investments to real estate. This option is required to benefit from the specific tax status. This means that the manager of such a fund shall not be subject to (other) obligations, without prejudice to its obligations under the AIFM Law (or equivalent in another Member State), if it manages other AIFs in the sense of the AIFM Directive.
Shares or partnership interests in a SREIF can be subscribed or offered to corporate institutional investors only as further listed by Royal Decree and by the Markets in Financial Instruments Directive. In addition, all corporations can opt to be treated as institutional investors via specific request to the Belgian supervisory authority the Financial Service and Markets Authority (FSMA).
A SREIF can invest only in real estate, defined as follows:
- Belgian and foreign real estate assets, as well as rights in rem on these assets;
- all the shares in Belgian companies owning real estate, provided that these companies either are merged into the SREIF or have opted for the SREIF regime within 24 months from the acquisition;
- shares in foreign real estate companies holding foreign real estate assets;
- shares in institutional BE-REITs;
- shares in Belgian SREIFs;
- shares in Belgian or foreign AIFs investing in real estate;
- shares in EEA REITs (as further defined by the SREIF Decree);
- options on real estate assets;
- real estate certificates;
- rights under real estate leasing; however, the activity of a lessor under a leasing with a purchase option can be only ancillary (with an exception for real estate assets dedicated to public interest, including social housing and teaching);
- concession rights granted by a public body; and
- loans to subsidiaries and guarantees or security to the benefit of subsidiaries.
A SREIF is subject to a minimum investment volume of at least €10 million at the end of the second financial year following its inscription on the SREIF list.
Real estate development, understood as a main or ancillary activity implying a forward sale or a sale within five years after construction, is strictly prohibited.
No compulsory diversification requirement or leverage limits apply to SREIFs, but a SREIF may freely decide to apply these types of limitations as part of its investment policy.
Financial statements and control
A SREIF must draw its (consolidated) financial statements in accordance with International Financial Reporting Standards (IFRS) and is subject to a yearly audit by an auditor recognised by the FSMA. The approval or direct supervision of the FSMA applies to the manager of the first category of SREIF and to the managers of the second category to the extent that they manage other AIFs in the sense of the AIFM Directive. The tax authorities are competent to monitor the compliance of the SREIF with the provisions of the AIFM Law and the SREIF Decree.
The SREIF is subject to a yearly distribution obligation amounting to at least the positive difference between (1) 80 per cent of its net profit (computed in accordance with the rules set forth in Annex A to the SREIF Decree) and (2) the net reduction of the SREIF indebtedness in the course of a financial year. Realised capital gains, provided that they are reinvested within four years, are exempted from this distribution obligation.
The duration of the SREIF is limited to a maximum of 10 years, it being understood that this duration can be extended, each time for a five-year period, subject to a decision taken by the unanimity of the votes at the general assembly of the investors.
ii Overview of the different regulated investment vehicles
In addition to the SREIF, the status of European long-term investment funds (ELTIFs) is also available for long-term infrastructure and real estate projects (transport, environmental and social infrastructure, public–private partnerships, care and social housing, schools and hospitals), to the extent that such long-term projects fit into a strategy of 'smart, sustainable and inclusive growth', as described by Regulation (EU) 2015/760. The ELTIF status, deriving from the Regulation, was implemented into the AIFM Law in the course of 2021.
ELTIFs can be listed or raise funds from institutional investors. An ELTIF is subject to the supervision of the FSMA, falls inside the scope of the AIFM Directive and therefore qualifies as an AIF.
Because of a strict regulatory framework and, until recently, an inadequate tax regime, no Belgian company has yet adopted the ELTIF status. However, EU institutions have recently opened discussions to revise the regulatory framework of the ELTIF, and its tax regime has been aligned with those of SREIFs and BE-REITs from a Belgian domestic perspective. In this respect, investment income (rental income, capital gains, dividends and interest) is not subject to CIT, although dividends are, in principle, subject to 30 per cent withholding tax, which can be reduced by virtue of relevant provisions of domestic law or tax treaty. The ELTIF, unlike the SREIF and the BE-REIT, is, however, not subject to any distribution obligation.
iii Tax payable on acquisition of real estate assets
Acquisition in asset deal
The net capital gain realised by the seller shall be subject to CIT at a rate of 25 per cent. The sale or the granting of a property right shall be subject either to transfer taxes or to VAT.
Upon option by an unregulated vehicle for the SREIF regime or upon merger of such an unregulated vehicle into a SREIF, the latent gain on the Belgian real estate and the tax-free reserves are subject to the exit tax at a rate of 15 per cent. The same applies to the contribution of real estate to a SREIF by a Belgian corporation.
The latent gain is computed based on the appraised value of the real estate asset, excluding transfer taxes. The tax losses of the Belgian company should be available for offsetting, subject to the limitation in use provided for by the tax legislation.
The option for the SREIF regime or the merger of an unregulated vehicle into a SREIF does not trigger transfer taxes or VAT.
iv Tax regime for the investment vehicle
CIT and treaty protection
A SREIF is formally subject to CIT at the statutory rate of 25 per cent but on a reduced taxable base considering:
- the abnormal or benevolent advantages received;
- the disallowed expenses (other than (1) capital loss and write-off on shares and (2) excessive borrowing costs in accordance with the Anti-Tax Avoidance Directive provisions on interest deduction restriction). In this respect, the tax and financial impact of certain regional taxes (e.g., tax on office surfaces) should not be underestimated, and attention must be paid to transfer pricing; and
- the special tax for secret commission (e.g., non-disclosed remuneration).
In other words, investment income (rental income, capital gains, dividends and interest) is not subject to CIT.
This formal subjection to CIT should allow the SREIF to claim treaty benefits from a Belgian standpoint.
A SREIF is subject to a yearly 0.01 per cent subscription tax on the net amounts invested in Belgium (i.e., to the extent that the SREIF's shares are held by Belgian residents).
Management services invoiced to a SREIF benefit from a VAT exemption.
v Tax regime for investors
Investments in Belgian real estate
Taxation of dividends
Dividends distributed to Belgian corporate shareholders do not benefit from the participation exemption regime and shall therefore be taxable in the hands of those shareholders, subject to the specific tax regime of the corporate shareholder concerned.
Dividends distributed by a SREIF are, as a rule, subject to 30 per cent withholding tax, which can, however, be reduced by virtue of relevant provisions of domestic law or tax treaty as follows:
- a withholding tax exemption shall apply to dividends distributed to Belgian corporations subject to a minimum participation of 10 per cent in the SREIF and a minimum uninterrupted holding period of one year; and
- dividends distributed to a foreign pension fund that (1) is not conducting a business or a lucrative activity, (2) is totally tax exempt in its country of residence and (3) is not contractually obliged to redistribute these dividends to a beneficial owner that cannot qualify for this exemption benefit from a withholding tax exemption.
Investments in foreign real estate
Taxation of the dividends
Dividends distributed to Belgian corporate shareholders benefit from the participation exemption regime in the hands of those shareholders, provided that:
- the SREIF directly holds the foreign real estate assets: the foreign real estate assets are located in the EEA or a treaty country (with exchange of information clause) and the income generated by these assets has been subject to regular income tax; or
- the SREIF indirectly holds the foreign real estate assets through a foreign company or companies: the foreign company meets the subject-to-tax requirement under the Belgian participation exemption regime.
A withholding tax exemption applies to dividends distributed to Belgian corporations subject to a minimum participation of 10 per cent in the SREIF and a minimum uninterrupted holding period of one year, and dividends distributed to foreign investors shall benefit from a withholding tax exemption without an underlying condition of taxation in the source state (the look-through approach).
Real estate investment trusts and similar structures
i Legal framework
The regulated real estate company (REC) was introduced by the Law of 12 May 2014 (the BE-REIT Law) and the Royal Decree of 13 July 2014 (the BE-REIT Decree) as an alternative to maintain the attractiveness and competitiveness of Belgium. The status of institutional REC has been implemented as well.
The main goal of a BE-REIT is the long-term holding and letting of real estate, including the active management of the real estate. Public BE-REITs and institutional BE-REITs are subject to FSMA supervision but fall outside the scope of the AIFM Directive.
A BE-REIT has a commercial activity, being the development and management of a real estate portfolio in its own corporate interest. This commercial activity is exercised by the BE-REIT itself or by a subsidiary, meaning that the BE-REIT must have an operational team representing a substantial part of its employees and must have direct relationships with clients and service providers.
ii Requirements to access the regime
A BE-REIT is subject to the supervision of the FSMA but falls outside the scope of the AIFM Directive and does not qualify as an AIF.
A BE-REIT must obtain a licence as a collective investment undertaking from the FSMA to be registered on the BE-REIT list. In this respect, the registration request comprises the information out of which the FSMA can assess the compliance of the BE-REIT with the BE-REIT Law and the BE-REIT Decree.
The BE-REIT must be structured as a non-tax-transparent fund vehicle – namely, a public limited liability company – with a minimum share capital of €1.2 million.
Eligible investors and listing
The subscription and transfer of securities issued by BE-REITs are open to every investor, to the extent that at least 30 per cent of the issued share capital is publicly traded and that the BE-REIT is listed on a regulated market.
Listing can occur only after registration on the BE-REIT list and after the publication of a prospectus, subject to specific requirements.
The BE-REIT Law expressly provides the possibility for a BE-REIT to issue securities other than shares (e.g., bonds or convertible bonds) to the exclusion of profit shares.
The principal activity of a BE-REIT consists of the active management of real estate assets. In this respect, BE-REITs are allowed to invest only in real estate, whether located in Belgium or not, which includes the following categories of assets:
- real estate and rights in rem on real estate;
- shares with voting rights in real estate companies (including intermediary holdings), whose share capital is held (directly or indirectly) for more than 25 per cent by the BE-REIT;
- option rights on real estate;
- shares in BE-REITs and in institutional BE-REITs, whose share capital is held (directly or indirectly) for more than 25 per cent by the BE-REIT;
- units of a foreign collective investment undertaking investing in real estate and registered on the Belgian FSMA list of foreign collective investment undertakings;
- units of a collective investment undertaking investing in real estate, established in the EEA and subject to an equivalent control;
- real estate certificates;
- shares in EEA REITs;
- shares in real estate investment companies;
- shares in SREIFs; and
- subject to limitations, rights resulting from financial leases as defined by the IFRS and analogous rights of use.
Real estate development, understood as a main or ancillary activity implying a forward sale or a sale within five years after construction, is strictly prohibited.
As an exception, ancillary or temporary investments in transferable securities are allowed, to the extent that the articles of association authorise such investments. A BE-REIT may hold hedging instruments covering its financial risk to the extent that its articles of association authorise such transactions. Speculative transactions are not allowed. The hedging strategy must be disclosed in the BE-REIT's financial reports.
The list of authorised activities of a BE-REIT includes the execution, indirectly or in a joint venture, with a public partner, of design build finance agreements, design build finance maintain agreements, design build finance maintain operate agreements or agreements for the concession of public works (i.e., participation in public–private partnerships).
The minimum participation required for investment in a joint venture is 25 per cent (plus one share) in the capital of the perimeter company, which can also opt for the status of institutional BE-REIT. For a BE-REIT, those participations (in the absence of exclusive or joint control) cannot exceed 50 per cent of its consolidated assets.
It is prohibited for a BE-REIT to enter into a shareholder's agreement that derogates from the vote cast according to its participation (being at least 25 per cent plus one share) in a joint venture.
Financial statements and control
A BE-REIT must draw its (consolidated) financial statements in accordance with IFRS and is subject to a yearly audit by an auditor recognised by the FSMA.
A BE-REIT cannot invest more than 20 per cent of its consolidated assets into a single real estate project. A real estate project is defined as one or more real estate objects subject to the same investment risk (e.g., the same tenant). Under certain specific conditions, a BE-REIT can obtain a derogation of this rule from the FSMA, provided that the leverage limit does not exceed 33 per cent of its consolidated assets.
This risk diversification requirement does not apply when an EEA Member State is the tenant, user or beneficiary of an infrastructure in the framework of a public–private partnership.
The risk diversification is assessed on an IFRS consolidated basis.
BE-REITs are subject to a double leverage limit:
- a debt-to-asset ratio of 65 per cent at both statutory and IFRS consolidated level; and
- an interest ratio of 80 per cent at both statutory and IFRS consolidated level; in other words, the interest expenses of the BE-REIT and its subsidiaries cannot represent more than 80 per cent of their annual operational and financial income.
The BE-REIT and its subsidiaries are prohibited from mortgaging (or otherwise encumbering) a real estate asset for more than 75 per cent of its value. In an intragroup relationship, no mortgage or other collateral can be granted except for financing the real estate activities, and the total amount covered by such mortgages or collateral cannot exceed 50 per cent of the global fair value of the real estate assets held by the BE-REIT and its subsidiaries.
The BE-REIT and its subsidiaries are prohibited from granting credit facilities and collateral to third parties.
These thresholds are calculated on an IFRS consolidated basis as well.
A BE-REIT is subject to a yearly distribution obligation amounting to at least the positive difference between (1) 80 per cent of its net profit (computed in accordance with the BE-REIT Decree) and (2) the net reduction of the BE-REIT indebtedness in the course of a financial year. No distribution is allowed if the (statutory or consolidated) indebtedness ratio already exceeds 65 per cent or will exceed this threshold because of the distribution.
Realised capital gains, provided that they are reinvested within four years, are exempted from this distribution obligation.
The institutional BE-REIT status is available to companies investing in immovable property, as defined above, or participating in public–private partnerships, provided that their share capital is owned, directly or indirectly, for 25 per cent plus one share by a BE-REIT. The capital of institutional BE-REIT is open to institutional or professional investors but also to retail investors, subject to a minimum investment value of €100,000.
The status of an institutional BE-REIT is not optional, meaning that the BE-REIT must choose between having all its subsidiaries subject to this status or not. Once a retail REIT holds an institutional REIT and acquires or incorporates another company, this company has 24 months to apply for institutional REIT status.
A type of non-stock-listed BE-REIT is available to finance and promote investments in care, subject to their accreditation by the competent authority, and is defined as infrastructures dedicated to:
- the housing or care of disabled persons;
- the housing or care of elderly persons;
- the care or help of young persons;
- the collective welcoming and care of children under the age of three;
- the teaching and accommodation of students;
- the operation of a psychiatric institution; or
- the operation of a revalidation centre.
Social BE-REITs are incorporated as cooperative companies with a social purpose, having a minimum fixed capital of €1.2 million. The variable capital can be subscribed by retail investors in a proportion to be determined by Royal Decree. Due to their corporate form, they guarantee a dividend of maximum 6 per cent (after deduction of the withholding tax) per year, but the exit is structured as a buy-back of shares at nominal value. The social BE-REIT must build up a liquidity reserve to execute these buy-back orders, which can themselves be limited.
A social BE-REIT is allowed only to invest in real estate and rights in rem on real estate and in leasing. A debt-to-asset ratio of 33 per cent is applicable as leverage limit.
iii Tax regime
Upon conversion of an unregulated vehicle into a BE-REIT or upon merger of such a company into a BE-REIT, the latent gain on the Belgian real estate and the tax-free reserves are subject to the exit tax at a rate of 15 per cent, as for the SREIF.
The acquisition of a right in rem by a BE-REIT is subject to the same real estate transfer tax as that applicable in cases of a direct acquisition by an unregulated company.
CIT and treaty protection
A BE-REIT is subject to the same CIT regime as that applicable to the SREIF.
A BE-REIT is subject to a yearly 0.0925 per cent subscription tax on the net amounts invested in Belgium (i.e., to the extent that the BE-REIT's shares are held by Belgian residents). Institutional BE-REITs are subject to a yearly 0.01 per cent subscription tax.
Tax on stock exchange
Any transfer for consideration of shares of BE-REITs is subject to a tax on stock exchange transaction of 0.12 per cent and the share buy-back is subject to a tax on stock exchange transaction of 1.32 per cent when it concerns capitalisation shares. Institutional BE-REITs are exempted from this tax.
Management services invoiced to the BE-REIT benefit from a VAT exemption.
iv Tax regime for investors
The tax regime of a BE-REIT's investors is the same as that applicable to SREIFs' investors. However, dividends distributed by the BE-REIT to its shareholders are subject to 15 per cent withholding tax (instead of a 30 per cent withholding tax) if the BE-REIT invests at least 80 per cent of its assets in real estate used for healthcare in the EEA.
v Forfeiture of REIT status
BE-REIT status can be forfeited (1) if the FSMA omits the BE-REIT from the BE-REIT list as a sanction (because the BE-REIT does not observe the laws, regulations or its articles of association on an ongoing basis, after recommendations to remedy to the situation) or (2) by request of the BE-REIT to be removed from the BE-REIT list.
The forfeiture of BE-REIT status has the following tax consequences:
- the results of the year concerned remain subject (1) to the BE-REIT tax regime until the forfeiture of the regime and (2) to the ordinary CIT regime as from this date;
- the share capital of the BE-REIT, in the sense of the corporate law legislation, shall be considered as fiscal capital for the purposes of CIT and withholding tax;
- the retained earnings, not yet distributed, of the BE-REIT, built up under the BE-REIT status, shall be considered taxed reserves for the purposes of CIT and withholding tax, these retained earnings having been subject to their own tax regime; and
- the revaluation surplus corresponding to the latent gain that has been subject to the exit tax should be considered as a taxed reserve for the purposes of CIT and withholding tax, as this revaluation surplus has been subject to its own tax regime – the exit tax.
International and cross-border tax aspects
i Tax treaties
Permanent establishment and Belgian establishment
Based on domestic law, foreign investors are subject to non-resident income taxation on their Belgian source income, if such income can be allocated to a Belgian establishment. This non-resident taxation in the case of a Belgian establishment shall, however, be subject to the presence of a permanent establishment pursuant to the applicable double tax treaty.
The Belgian Model Tax Treaty follows the OECD Model Tax Treaty in respect of the definition of 'permanent establishment', without any reservation. Whether Belgian real estate constitutes a permanent establishment for the purposes of the application of tax treaties must be analysed based on factual elements.
The absence of a permanent establishment in Belgium for the purposes of the application of tax treaties does not necessarily result in the absence of a Belgian establishment, the existence of which creates tax obligations in Belgium.
Although similar to the definition of 'permanent establishment' that appears in the OECD Model Tax Treaty, the term 'Belgian establishment' is somewhat broader than the OECD terminology. In this respect, old case law states that even the merely passive renting of Belgian real estate investments by a foreign entity constitutes a Belgian establishment when the articles of association of the foreign entity mention the exploitation of real estate in their corporate purpose.
The assessment of a permanent establishment or a Belgian establishment will, however, not be pertinent to determine which state has the right to tax income from (the transfer of) immovable property, but only to determine the source of movable income, for example, in the context of interest payments. As Article 6 of the OECD Model Tax Treaty takes precedence over Article 7 (business profits), income from Belgian real estate is therefore always taxable in Belgium, even if it does not constitute a permanent establishment.
Income from immovable property
According to the Belgian Model Tax Treaty, which follows Article 6 of the OECD Model Tax Treaty in this respect, the right to tax income from (the transfer of) immovable property belongs to the state in which the property producing such income is located.
Non-resident entities are subject to non-resident income taxation, which is levied on their Belgian source income resulting from the transfer or the renting of a real estate asset located in Belgium, whether or not they are connected with a permanent establishment or a Belgian establishment.
Taxation of capital gains
Unlike numerous countries, Belgium does not assimilate the sale of shares in companies whose main assets consist of real estate with the sale of real estate for CIT purposes.
In this respect, Belgium reserved the right not to include Paragraph 4 of Article 13 of the OECD Model Tax Treaty in its conventions. Subsequently, most of the tax treaties concluded by Belgium allocate the right to tax capital gains to the state of which the alienator is a resident, even in the case of a share deal on a company whose main assets consist of real estate.
We can, however, observe that Paragraph 4 of Article 13 of the OECD Model Tax Treaty is being implemented more and more often in the case of renegotiation of older treaties concluded by Belgium.
OECD Multilateral Instrument
Belgium signed the OECD Multilateral Instrument (MLI) on 7 June 2017. The MLI entered into force for Belgium on 1 October 2019. For CIT, the MLI provisions will affect taxable periods that begin on or after 1 April 2020.
In line with its treaty policy, Belgium has chosen to not include Article 13(4) of the OECD Model in all of its covered tax treaties and has entered a reservation in respect of Paragraph 1(a) of Article 9 MLI, which introduces a 365-day reference period for determining whether the value threshold that triggers the application of the analogous provisions of Article 13(4) of the OECD Model has been reached.
On the other hand, Belgium has not entered a reservation with regard to Paragraph 1(b) of Article 9 MLI, which extends the scope of the existing provisions to holdings in entities such as partnerships and trusts. Subsequently, the scope of application of the provisions contained in the 10 tax treaties concluded by Belgium should be extended to cover transfers of interests in entities other than companies.
ii Cross-border considerations
Under Belgian law, there are no restrictions on foreign investment in real estate. No specific incentive for foreign investment applies either.
One should, however, pay attention to EU rules on money laundering and on sanctions, as economic operator and services providers (e.g., lawyers and notaries) might be prevented from doing business with certain parties that are subject to restrictive measures or for which know your customer and client due diligence is not conclusive. This is, however, not typical for real estate and applies to any type of business.
iii Locally domiciled vehicles investing abroad
Belgium as place of establishment of funds or platforms
Belgium may offer the following advantages for establishing a real estate fund or an investment platform.
- An extensive tax treaty network that, in most cases, currently does not assimilate the sale of shares in companies whose main assets consist of real estate with the sale of real estate for CIT purposes: accordingly, most of these treaties allocate the power to tax capital realised on shares to the state of residence of the seller (Belgium), where it should be tax exempt provided that the underlying company complies with the subject-to-tax requirements.
- Withholding tax exemptions for dividends distributions to foreign pension funds: dividends distributed to a foreign pension fund that (1) is not conducting a business or a lucrative activity; (2) is totally tax exempt in its country of residence; and (3) is not contractually obliged to redistribute these dividends to a beneficial owner that cannot qualify for this exemption benefit from a withholding tax exemption.
- Withholding tax exemption for dividends distributions to corporate shareholders: dividends distributed to corporates established in a treaty country should benefit from a withholding tax exemption subject to the same conditions provided for in the EU Parent–Subsidiary Directive as follows:
- the parent company holds at least 10 per cent of the share capital of the Belgian distributing company and that participation has been (or will be) held in full ownership for an uninterrupted period of at least one year. Even if this one-year holding period requirement is not fulfilled at the time of the dividend distribution, the parent company can benefit from the exemption if it commits to hold this participation;
- the Belgian distributing company and its parent company are incorporated under one of the legal forms listed in the appendix to the EU Parent–Subsidiary Directive or under an analogous legal form;
- the parent company must be established in a country with which Belgium has entered into a tax treaty and, under the laws of the respective treaty country and in accordance with the tax treaties concluded by that country with third countries, be deemed to have its tax domicile in that country (no dual residence); and
- the Belgian distributing company and its parent company must be subject to CIT or to a tax analogous to CIT, without enjoying a tax regime that deviates from the common tax system.
- Withholding tax exemptions for redistribution of foreign source real estate by SREIF: dividends stemming from foreign source real estate income distributed by a SREIF to foreign investors are exempt from withholding tax (the look-through approach).
Business reasons, substance and beneficial ownership
Recent case law from the European Court of Justice (i.e., the Danish cases) should be taken into consideration, according to which EU law (e.g., the Parent–Subsidiary Directive or the Interest and Royalty Directive) cannot be relied on for abusive or fraudulent ends. Following that principle, a Member State must refuse to grant the benefit of the provisions of EU law where they are relied upon not with a view to achieving the objectives of those provisions but with the aim of benefiting from an advantage in EU law, although the conditions for it are fulfilled only formally.
In a nutshell, conduit companies that are artificially interposed as beneficiaries of interests or dividends, to benefit from the exemptions provided by the EU Directives, should be disregarded.
Year in review
From a tax standpoint, the year in review has seen (1) an increase of the transfer tax in Flanders, from 10 per cent to 12 per cent; (2) new measures to reduce the VAT rate to 6 per cent for certain residential projects with the aim of supporting the construction sector; and (3) the signing of a new tax treaty between Belgium and France.
In respect of the new tax treaty between Belgium and France, the most important modifications regarding cross-border real estate investments are as follows.
- The maximum dividend withholding tax rate is reduced to 12.8 per cent, with a full exemption available subject to a minimum holding of at least 10 per cent of the share capital for a period of 365 days. This provision, however, does not apply to (Belgian or French source) dividends distributed by an investment vehicle that distributes the largest part of its income annually and whose income and gains from real estate are tax exempt. For those dividends, the reduced rate of 12.8 per cent shall apply, provided that the beneficial owner holds, directly or indirectly, a participation of less than 10 per cent in the capital of the investment vehicle. In other cases, the dividends will be subject to the domestic withholding tax (i.e., a withholding tax of 30 per cent for Belgian source dividends).
- No withholding tax would apply on interest payments under the new tax treaty.
- A real estate-rich clause is added in the relevant provision for capital gains, allowing the state where the real estate is located to tax gains deriving from the alienation of shares. Two conditions apply: (1) the value of the assets of the company whose shares are sold must derive, directly or indirectly, by more than 50 per cent from immovable property located in that state; and (2) the state, according to its own legislation, must subject this sale of shares to the same tax regime as the sale of real estate assets. If these conditions are not fulfilled, the power to tax is allocated to the state of the seller.
Tax audits and case law currently remain focused on financing structure, with three main topics under scrutiny.
- The (disputed) deduction of interest in debt push-down transactions in the form of leveraged dividend distributions or capital repayment, or both: the Court of Cassation has confirmed that the interest borne in such a debt push-down transaction is not per se non-tax deductible. However, the Court also confirmed that the deductibility of this interest is subject to compliance with the general tax deductibility requirement, being that the interest must be borne by the company with a view to acquiring or maintaining taxable income, and that the taxpayer must be capable of demonstrating that this requirement has been met. Taxpayers should therefore carefully document and describe the business rationale behind this type of leveraged distribution and justify compliance with tax deductibility conditions.
- The withholding tax (exemption) on dividends and interest: based on domestic legislation (including the implementation of EU Directives) and tax treaties, many withholding tax reductions or exemptions can be applied to Belgian source dividends and interest. These withholding tax reductions and exemptions are, most of the time, subject to compliance with formalities, such as the Belgian payor in possession of a certificate confirming that the conditions to benefit from the exemption are met. In addition to the mere compliance formalities, the Danish cases have attracted the attention of the tax authorities. A special task force is focusing on performing audits on withholding tax exemptions and reductions applied by Belgian taxpayers to verify whether the recipient was effectively allowed to benefit from the exemption or reduction claimed, considering the Danish cases and whether the compliance formalities have been strictly complied with.
- The at-arm's-length character of intragroup loan pricing: the dedicated transfer pricing cell continues performing audits on intragroup financing to assess the at-arm's-length character of the interest applied. Benchmark analysis documented and performed well in advance is a real asset for taxpayers in their defence during such audits.
Market trends see the development of 'residential' as an asset class for institutional investors and the boom of forward transactions due to lack of (qualitative) products compared with the available funds. In addition, the set-up of real estate funds as joint ventures between investors and developers is expected to increase, with a particular focus on and interest in (future) residential assets.
From an international tax standpoint, great attention will be directed to the entering into force of the new tax treaty between France and Belgium. This tax treaty mostly matches the recent tax treaty between France and Luxembourg as far as real estate investments are concerned, with, as a ground-breaking modification, the introduction of the concept of a real estate company.
As with many European jurisdictions, the publication of the draft Anti Tax Avoidance Directive III has raised numerous questions in terms of structuring of real estate acquisitions. Although conduit companies that are artificially interposed as beneficiaries of interests or dividends, to benefit from the exemptions provided by the EU Directives, should be disregarded following recent case law from the European Court of Justice (i.e., the Danish cases), local tax authorities could also be allowed soon to deny eligibility to tax treaties for at-risk entities that would lack sufficient substance. At the time of writing, public consultation on this draft Directive is closed, but it remains unclear how quickly the legislative process will proceed and, more importantly, whether it will reach the unanimity required at European level.
1 Ariane Brohez and Christophe Laurent are partners and Antoine Béchaimont is senior associate at Loyens & Loeff.