Unsolved tax issues after 10 years of practice Thierry Blockerye 22 November 2005

Unsolved tax issues after 10 years of practice · 22 November Table of Contents 1.Corporate income tax issues 1.1. Should corporate tax be included in the taxable basis of Sicafis ? 1.2. Is the exit tax rate also applicable to regular profits ? 1.3. Avoidance of double economic taxation at the level of the corporate shareholder of a real estate company to be merged into a Sicafi 1.4. Differences in the tax treatments available according to the manner real estate is transferred to Sicafis 1.5. Difficulties generated by the 10% withholding tax on liquidation bonuses

Unsolved tax issues after 10 years of practice · 22 November Table of Contents (cont’d) 2.Transfer tax issues 2.1. General 2.2. Specific issues relating to Sicafis 2.3. Type of rulings obtained by Sicafis 3.VAT issues 3.1. Qualification as a VAT person 3.2. Output VAT regime 3.3. Input VAT regime – management activities 3.4. Sicafis may not act as a professional builders – indirect consequences

Unsolved tax issues after 10 years of practice · 22 November Table of Contents (cont’d) 4.Tax issues relating to the loss of the tax status of a Sicafi 4.1. Timing of the loss of status 4.2. Tax value of assets 4.3. Tax composition of equity 4.4. Registration duties 5.Is the present tax status of Sicafis attractive enough to lead to the development of Sicafis at an international level ? 6.Conclusions

1. Corporate Income Tax Issues

Unsolved tax issues after 10 years of practice · 22 November Corporate Tax Issues 1.1. Should corporate tax be included in the taxable basis of Sicafis ? Basic taxation principles for Sicafis Specific tax regime (art. 143 / law of 4 December 1990) Subject to corporate tax but has a very limited taxable basis Received abnormal and benevolent advantages Disallowed expenses (regional taxes !) Secret commissions tax Rate of taxation 33.99% (standard rate) 309% (secret commission tax) % (not really applicable to Sicafis but rather applicable to companies which will be recognised as Sicafis or which will be merged into Sicafis)

Unsolved tax issues after 10 years of practice · 22 November Corporate tax to be included in the taxable basis of Sicafis ? Basic taxation principles for Sicafis (cont’d) Corporate tax stricto senso should be added to the taxable basis Tax on tax effect: the effective rate is increased up to 51.49% Perverse effect, not conform to “ratio legis” Logical for standard companies but not for Sicafis Same issue for Belgian Coordination Centres Last case law: decisions unfavourable de lege ferenda: this issue should be solved in tax law

Unsolved tax issues after 10 years of practice · 22 November Is the exit tax rate also applicable to regular profits ? The recognition of a real estate company as a Sicafi (or as a merger into a Sicafi) is a deemed fiscal liquidation A liquidation implies a distribution of all assets at fair market value and hence triggers a taxation of the latent gains and the tax-free reserves Reduced rate of % justified by the anticipation of a taxable event Taxable basis of the latent gains has now been addressed by a circular (24 December 2004)  Value of the property, transfer taxes excluded

Unsolved tax issues after 10 years of practice · 22 November Is the exit tax rate also applicable to regular profits ? Does the exit tax rate also apply to regular profits ? Text argument: –Exit tax rate is applicable to the taxable amounts in the framework of a transaction provided in article 210 §1, 5° of ITC (article 216) This issue should be addressed in the tax law

Unsolved tax issues after 10 years of practice · 22 November Avoidance of double economic taxation at the level of the corporate shareholder After the recognition or the merger into a Sicafi, the corporate shareholder no longer benefits from the participation exemption regime The recognition or the merger into a Sicafi is only deemed a liquidation for tax purposes, not for accounting purposes Impossible to operate a taxable step-up of the participation in the accounts of the corporate shareholder with the risk of having a double economic taxation on the embedded gain of the participation

Unsolved tax issues after 10 years of practice · 22 November Avoidance of double economic taxation at the level of the corporate shareholder Solution accepted by the Minister of Finance (private rulings) Tax revaluation in the tax return of the corporate shareholder Declaration of a taxable reserve (underestimation of the tax value), taxable as a dividend (95% participation exemption) Amount of the taxable reserve equals to the difference between the fair market value of the company and the tax value of the participation

Unsolved tax issues after 10 years of practice · 22 November Avoidance of double economic taxation at the level of the corporate shareholder Market value of the company: Should one take into account the value all-in of the underlying real estate or the value taxes excluded ? Second solution is more logical: The real estate company is subject to exit tax only on the difference between the value taxes excluded and the tax value (Circ. 23 December 2004) and therefore there is only an issue of double economic taxation on the basis of the value tax excluded De lege ferenda: This solution should be provided in the tax law Other solutions to avoid the double economic taxation: Sale of the participation in the real estate company prior to its recognition as a Sicafi or its merger with a Sicafi Tax aggressive ?

Unsolved tax issues after 10 years of practice · 22 November Differences in the tax treatments available according to the manner real estate is transferred to Sicafis General parallelism between mergers, splits, partial splits, contributions of universality, contributions of branches of activities: Possibility to have a taxable transaction or a tax exempt transaction Above parallelism not applicable to Sicafis: Exit tax only in the case of: –Mergers –Splits –Partial Splits Differences in the tax treatments are not really justifiable Limited impact in practice since mergers constitute the preferred way of transfer

Unsolved tax issues after 10 years of practice · 22 November Difficulties generated by the 10% withholding tax on liquidation bonuses Tax issue more present for individual shareholders than for corporate shareholders (which may benefit from a range of exemptions) If due by the corporate shareholder, tax credit (and reimbursement possibility) within the limits of article 282 of the ITC (no reduction in value and 1-year uninterrupted holding period) When applicable, withholding tax triggers cash flow problems as the remuneration in mergers consists only in the form of shares

Unsolved tax issues after 10 years of practice · 22 November Possible solutions: Withholding tax (WHT) is supported by the real estate company and the debt is taken into account when determining the number of Sicafi shares to be issued Partial remuneration in cash, corresponding to the withholding tax to be paid Agreement with the promotor – bank Ways to avoid the issue: Sale of the participation in the real estate company to the Sicafi and wait for 1 year 1.5. Difficulties generated by the 10% withholding tax on liquidation bonuses

2. Transfer Tax Issues

Unsolved tax issues after 10 years of practice · 22 November Transfer tax issues 2.1. General A wide variety of real estate transfers are exempt from transfer taxes Contribution of property Contributions of a branch of activity / universality Mergers / absorptions Classic splits Up to a certain extent, partial splits (! “Mixed” contributions !) Different tools available to the tax authorities in order to reclassify an operation or a series of operations into a taxable transaction Simple requalification Sham / simulation Requalification by virtue of art. 18 RDC

Unsolved tax issues after 10 years of practice · 22 November General (cont’d) Possibility to ask for rulings Informal rulings (demande de perception / aanvraag tot perceptie) Formal rulings

Unsolved tax issues after 10 years of practice · 22 November Specific issues relating to Sicafis Contribution of real estate assets followed by the sale of the shares issued by the Sicafi Typically the transaction will be subject to scrutiny by the tax authorities Rulings obtained in the framework of Sicafi IPOs Simulation (sham) impossible if parties accept the legal consequences of the transactions put in place Requalification only possible if the requalified transaction provides the same economic consequences as the operations presented by the parties

Unsolved tax issues after 10 years of practice · 22 November Specific Issues related to Sicafis (cont’d) Acquisition of 100% of the shares in a real estate company immediately followed by a merger into a Sicafi Less frequent way of transfer than in the past Simulation (sham) impossible if parties accept the legal consequences of the sale / merger Requalification in our view very difficult

Unsolved tax issues after 10 years of practice · 22 November Type of ruling obtained by Sicafi Formal rulings When launching an IPO of a Sicafi –Contributions of property followed by the sale of shares –Contributions of property (with the benefit of the tax exemption) before actual recognition by the CBFA Informal rulings Consolidation of the full ownership of property –Leasehold transferred in the framework of a merger –Freehold transferred in the framework of a contribution

3. VAT issues

Unsolved tax issues after 10 years of practice · 22 November VAT issues 3.1. Qualification as a VAT person Art. 4 of VAT Code: Sicafi qualifies as a VAT person 3.2. Output VAT regime According to art 44, §3, 11° of the VAT Code, operations carried out by Sicafis are tax exempt Not to be interpreted too restrictively Sicafis may perform VATable transactions, e.g.: Real estate VAT leasing Rent of parking spaces Rent of warehouses Provide services ancillary to real estate renting Sale of full ownership / right in rem of a «new» building for VAT purposes

Unsolved tax issues after 10 years of practice · 22 November Input VAT regime No VAT deduction for exempt activities VAT deduction for taxable activities Quid applicable ratio for the deduction ? Quid services relating to the management of Sicafis Position of the tax authorities: only for duties imposed by the law or CBFA VAT exemption not applicable to advisors, auditors, real estate appraisers, … Position could be reviewed in the future as management is a concept of European Law (case law pending), and the implementation of EC Directive Units III which further defines the notion of management

Unsolved tax issues after 10 years of practice · 22 November Sicafis may not act as professional builders Inadequate assimilaton between professional developers and professional builders Consequences: automatic self-supply in case of merger of a professional constructor company with a Sicafi Necessity to opt in order to have a sale / granting of rights in rem with VAT No impact of sale / granting of rights in rem on deduction prorata Prefinancing of VAT in case of the erection of new buildings

4. Tax issues relating to the loss of the Sicafi status

Unsolved tax issues after 10 years of practice · 22 November Tax issues relating to the loss of the Sicafi status Loss of the Sicafi status can be voluntary or as a result of a penalty imposed by CBFA 4.1. Importance of the timing of the loss Retroactivity for the whole accounting period or not Practical solution: to operate a hard closing before asking the withdrawal of the recognition

Unsolved tax issues after 10 years of practice · 22 November Tax value of real estate assets and basis for depreciation In our view, certain revaluation surpluses cannot be depreciated from a tax point of view : Revaluation surpluses accounted for the difference between the value all taxes included and all taxes excluded Revaluation surpluses accounted after the transfer into a Sicafi in order to reflect an increase in value Planning possibilities ?

Unsolved tax issues after 10 years of practice · 22 November Tax composition of equity Paid-in capital Taxable reserves Untaxed revaluation surpluses (see 4.2) In principle, no other realised tax-free reserves

Unsolved tax issues after 10 years of practice · 22 November Registration duties Recapture of stamp duties when exemption granted on basis of art. 122, al. 1, 4° of RDC

5. Is the present tax status of the Sicafi attractive enough to be developed internationally ?

Unsolved tax issues after 10 years of practice · 22 November Is the present status of the Sicafi attractive enough to be developed internationally ? Positive points Subject to corporate tax, even with limited taxable basis, and hence application of the OECD double taxation treaties Exit tax Transfer tax exemptions Interest income not taxable (including those relating to loans granted to subsidiaires) Combination possible with similar foreign tax-free entities (French SIIC regime)

Unsolved tax issues after 10 years of practice · 22 November Negative points Still some unclear tax issues No consolidation for Belgian subsidiaries Taxation of income from real estate certificates (liquidation coupon) Taxation of dividends –Nearly impossible to avoid Belgian WHT for individuals / institutions –Corporate shareholders are taxed on the dividends and future capital gains in their country of residence 5. Is the present status of the Sicafi attractive enough to be developed internationally ?

6. Conclusion

Unsolved tax issues after 10 years of practice · 22 November Conclusion

Clifford Chance, Avenue Louise 65, Box 2, 1050 Brussels, Belgium © Clifford Chance LLP 2005 Clifford Chance Limited Liability Partnership Unsolved tax issues after 10 years of practice v1