Real Estate Tax Services Newsalert BELGIUM

18 June 2009

Welcome to the fourth issue of our PwC Real Estate Tax Services Newsalert Belgium. In this issue, we treat the tax issues affecting debt relief/debt buy-backs and recapitalisation measures, the new Business Continuity Act, some further economic recovery measures and tax incentives for brownfield developments.

We also highlight a newly proposed EU directive on alternative investment fund managers, which may have far-reaching consequences for the European real estate fund industry.

Finally, we give more details about the so-called 'VAT Package' and its relevance for the sector, and a draft bill regarding the VAT treatment of the putting at the disposal of real estate for ports, airports and navigable waterways.

• Debt buy-backs/waivers and recapitalisation of distressed companies and Belgian tax implications
  According to reports in the press and observations by practitioners, investors are considering acquiring loan receivables from third-party banks owed by their real estate entities (so-called 'debt buy-back'). The purchase price for these notes is often less than the face value of the underlying liabilities. Part of the debt acquired can be used to decrease the borrowers’ leverage, for example to remedy solvency issues. Alternatively, the real estate companies can be given equity that is used to acquire their (own) debt. Such debt relief/recapitalisation measures will trigger adverse tax consequences for real estate companies if they are not supported by a sound business purpose.
• Business Continuity Act and tax benefits
  The Business Continuity Act provides assistance for businesses in financial difficulties (in a bid to avoid bankruptcy). It replaces the Judicial Compositions Act of 17 July 1997 with a more flexible system, so-called 'judicial reorganisation'. The new system also contains certain tax benefits.
• Temporary additional real estate tax relief measure
  Temporary measure for real estate withholding tax on immovable machinery and equipment in the Flemish Region for financial year 2009.
• Favourable transfer tax measure for brownfield developers in the Walloon Region
  Further to recent legislation introduced in the Walloon Region, the taxable basis for transfer tax now excludes certain costs in the case of a transfer of polluted land: the costs of studies or clean-up operations are left out. The measure is a bid by the Walloon Parliament to encourage the clean-up of polluted land.
• Proposed EU directive on alternative investment fund managers (AIFM Directive)
  A new EU directive has been proposed on alternative investment fund managers, which may have far-reaching consequences for the European real estate fund industry.
• VAT Package: Listing for intra-Community services and changes to VAT returns
  The recently introduced VAT Package will make important changes to current place of supply rules on services, the liability to account for VAT by the recipient of services (the reverse charge) and the exchange of information between EU Member States. The various measures are set to be implemented gradually into national laws between 2010 and 2015.

We trust that you find the above information useful. Should you have any questions, please contact us.
Best regards,

Debt buy-backs/waivers and recapitalisation of distressed companies and Belgian tax implications

According to reports in the press and observations by practitioners, investors are considering acquiring loan receivables from third-party banks owed by their real estate entities (so-called 'debt buy-back'). The purchase price for these notes is often less than the face value of the underlying liabilities. Part of the debt acquired can be used to decrease the borrowers’ leverage, for example to remedy solvency issues. Alternatively, the real estate companies can be given equity that is used to acquire their (own) debt. Such debt relief/recapitalisation measures will trigger adverse tax consequences for real estate companies if they are not supported by a sound business purpose.

From a Belgian tax perspective, unless a debt waiver (debt cancellation/debt forgiveness) is carried out in the framework of a judicial restructuring (see below), the Belgian tax authorities could argue that it qualifies as a so-called abnormal or gratuitous benefit in the hands of the beneficiary. If so, certain tax deductions (e.g. carryover tax losses and notional interest deduction) cannot be claimed against that part of profit stemming from the abnormal or gratuitous benefit. Moreover, the Minister of Finance has said that the benefit constitutes a minimum tax base.

That said, the current position of the Belgian Ruling Commission is that the beneficiary of a waiver can claim full tax relief (i.e. the waiver of debt is not regarded as abnormal or gratuitous) if a number of conditions are fulfilled. If the debtor is in financial difficulties and both the granter and the recipient of the waiver have an economic interest in the waiver being granted, they can apply for an up-front ruling to confirm that no tax will fall to be charged in the hands of the debtor. In the case of a conditional waiver of debt, once the debtor’s financial situation recovers, the debt should revive.

Recapitalisation measures can also constitute a direct or indirect change in control: this needs to be supported by legitimate financial or economic needs (i.e. a sound business purpose from the viewpoint of the Belgian company undergoing the change of control) in order to avoid forfeiture of its tax assets (e.g. carryover tax losses and carryover notional interest deduction). It is the Belgian company in which control changes that bears the burden of proof in this respect. A change of control within a consolidated group is deemed to meet the legitimate financial or economic needs test.

Business Continuity Act and tax benefits

The Business Continuity Act provides assistance for businesses in financial difficulties (in a bid to avoid bankruptcy). It replaces the Judicial Compositions Act of 17 July 1997 with a more flexible system, so-called 'judicial reorganisation'. The new system also contains certain tax benefits.
The aim of judicial reorganisation is to enable the debtor to:

• enter into a settlement agreement with two or more of its creditors;
• obtain the consent of its creditors to a collective restructuring plan for a maximum of five years. If approved by the majority of the creditors representing the majority of the claims, the plan is binding upon all creditors; and
• transfer all or part of its business or activities.

Moreover, the Act provides for a significant tax incentive, in that a waiver of debt granted in the context of such a settlement is not taxable in the debtor’s hands, but remains fully deductible for Belgian corporate creditors.

Creditors can benefit from a tax exemption for write-downs and provisions relating to receivables due by debtors involved in judicial reorganisations until execution of the reorganisation plan or closure of the procedure.

Finally, the Act provides for VAT-refund mechanisms in cases of debt reduction.

Temporary additional real estate tax relief measure

Temporary measure for real estate withholding tax on immovable machinery and equipment in the Flemish Region for financial year 2009.

Certain machinery and equipment items qualify as immovable assets (by nature or destination) and hence property tax can fall to be charged on them.

The tax comprises regional, provincial and municipal elements (the province and municipality taking the lion’s share, around 75%).

For certain new machinery and equipment, exemptions from property tax have already been introduced in the Flemish and Walloon Regions (for the regional, provincial and municipal portions). For machinery and equipment investments in the Brussels-Capital Region, a tax credit has been made available.

For financial year 2009, the Flemish government will now waive the provincial surcharges for machinery and equipment that previously failed to qualify for the exemption. In respect of the municipal surcharges (in the Flemish Region), payment may be deferred. Both reliefs are granted automatically for financial year 2009 and hence no action is required by the taxpayer.

Favourable transfer tax measure for brownfield developers in the Walloon Region

Further to recent legislation introduced in the Walloon Region, the taxable basis for transfer tax now excludes certain costs in the case of a transfer of polluted land: the costs of studies or clean-up operations are left out. The measure is a bid by the Walloon Parliament to encourage the clean-up of polluted land.

The 12.5% tax on transfers of land in the Walloon Region is calculated on the sale price plus all fees charged to the purchaser.

Under recent legislation introduced in the Walloon Region, the taxable basis for the transfer tax now excludes certain costs for transfers of polluted land. The charges to be taken into account for determining the taxable basis do not include study costs or clean-up costs related to the polluted property. With this measure, the Walloon Parliament hopes to provide an incentive for cleaning up polluted land.

In the Flemish Region, there is already a full exemption from transfer tax (subject to conditions) for transfers of developed or undeveloped land qualifying as “brownfield” sites (neglected or under-utilised plots that are polluted to such extent that they can only be used or reused once structural measures such as demolition or building renovation works have been carried out).

Proposed EU directive on alternative investment fund managers (AIFM Directive)

A new EU directive has been proposed on alternative investment fund managers, which may have far-reaching consequences for the European real estate fund industry.

On 30 April 2009, the EU proposed a new directive on alternative investment fund managers, which has a significant impact on the European real estate fund industry.

As it stands, the directive will extend to managers of hedge funds, private equity funds, commodity funds and other types of institutional funds, including real estate funds. It only deals with funds for investors acting in the course of business. It may be extended to retail funds by the member states, in the same or a modified form.

The directive will cover closed and open-ended vehicles, partnerships and, say, FCPs and SICAF/Vs. It is so widely drafted that it potentially extends to REITs, investment trusts and even listed companies where they act as vehicles for collective investment.

The threshold for assets under management is very low for leveraged real estate funds (EUR 100 million). This threshold is not on a per-fund basis, but rather the aggregation of all funds under management by a manager, and is therefore likely to have virtually universal application to professionally managed real estate funds.

The directive is far-reaching in its scope and may result in a level of regulation comparable to the supervised regulated fund-manager regimes in Germany or Luxembourg or for the French OPCI. The real estate fund sector is currently broadly divided into systems that are already regulated and low-regulation partnership regimes. For the latter, significant, or even radical, changes could be required and increased costs incurred. The themes of the directive include governance, regulator authorisation for managers, disclosure, risk management, credit institutions acting as depositaries and valuation guidance. The Commission reserves the right to impose caps on leverage that a manager can employ, which could form a very significant intrusion into the commercial activities of the real estate fund industry. In addition, there does not appear to be a level playing field with EU-registered banks, pension funds and insurance companies potentially enjoying a carve-out from the directive, which could give them an advantage over, say, private equity fund managers.

The directive is likely to be viewed as too wide-ranging for the real estate sector, particularly as the Commission does not seem to fear the existence of any systemic risks. In addition, it will remove choice from investors as to whether a highly regulated fund manager or a less-regulated one is more appropriate to meet their specific needs.
Details of the proposal and further related material can be accessed here

Although the directive will not be coming into force until 2011, the form it takes is likely to be decided over the course of this year and it is critical to both understand and prepare for its impact, and to influence its shape and content while there is still a chance to do so.

PwC Real Estate teams have formed a cross-border expert group to discuss the broader initiative as well as the details of the proposed rules.

VAT Package: Listing for intra-Community services and changes to VAT returns

The recently introduced VAT Package will make important changes to current place of supply rules on services, the liability to account for VAT by the recipient of services (the reverse charge) and the exchange of information between EU Member States. The various measures are set to be implemented gradually into national laws between 2010 and 2015.

On 12 February 2008, the EU Council of Ministers adopted a new package of VAT measures, known as the ‘VAT Package’.

The purpose of the VAT Package is to ensure that VAT on services accrues to the country of consumption. Hence:

• as from 1 January 2010, as a general rule, business-to-business supplies of services will be taxed where the customer is situated;
• supplies of services connected with immovable property will continue to be taxed in the country where the property is located (as is currently already the case).

To make sure that VAT is properly paid and collected in the country of consumption, new VAT-reporting obligations will come into force as from 1 January 2010.  

The most important of these is the obligation on service providers to draw up a special listing reporting those intra-Community services that are taxable in the country of the recipient under the reverse charge mechanism. Tax administrations are committed to making this information readily available to their colleagues in other EU Member States. 

In Belgium, the provision and receipt of such services will also have to be reported in separate new boxes in the Belgian VAT return.

As a result,

• the Belgian VAT administration will more easily be able to identify if a Belgian real estate company (with or without a right to deduct VAT) receives services from a taxable person in another EU country, and consequently whether the Belgian real estate company is liable to pay Belgian VAT on those services;
• Belgian taxable persons rendering services to a recipient in another EU country must first assess whether the services are taxable in the recipient’s country under the reverse charge mechanism – they need to know what the requirements of the VAT legislation in that other country are !! – and, if so, report those services in their intra-Community listing and in Belgian VAT return.

A further important change is that, contrary to the present situation, so-called section 44 transactions – such as exempt real estate income for which no invoice needs to be issued – will also have to be reported in the VAT return. According to the Belgian Minister of Finance, this measure is being taken to combat fraud and for risk analysis and data-mining purposes. At the very least, it will make it easier for the Belgian VAT administration to review pro-rata VAT-deduction calculations.

Now more than ever is the time to map and VAT-analyse your company’s cross-border services, inbound and outbound, and take appropriate action. Within the next 7 months, your VAT accounting and reporting systems should be up and running and adjusted in line with these new changes.  Persons in charge of bookkeeping (AP/AR) will require proper instruction. 

Draft bill approved: VAT on the putting at the disposal of real estate for ports, airports and navigable waterways

Belgium’s government has approved a draft bill removing the VAT exemption on the putting at the disposal of real estate for the operation of ports, airports and navigable waterways. If adopted into Belgian law, output VAT will apply on such income, and input VAT paid on related investments will be recoverable.