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Print articleReal Estate Outsourcing: A Trend That is Here to Stay?
May, 2009 - Luc Spincemaille
Companies (listed and unlisted) spinning off real estate at Belgian or at both Belgian and European level is common practice. In comparison to the U.S. market, the trend is only just in its early stages here.
Outsourcing often conceals widely varying realities:
- a company shareholder may want to divide his corporate assets among his future heirs. The 'active' heirs will participate in the business, whereas the 'passive' heirs will be involved in the real estate undertaking. In practice, this then often leads to a split between the business activity and the real estate.
- a company may want to improve its cash-flow position and therefore decides to dispose of real estate.
- shareholders may decide to sell their company, but note that a sale is easier to achieve if the real estate issue is settled first.
- a company may want to offer a real estate business already operating within the company the opportunity – by means of a spin-off – to develop faster and thus to grow into a real estate company in its own right.
- a company may want to increasingly focus exclusively on its core activities; if the real estate is not part of this it will be put up for sale.
- etc.
However, disposing of real estate does not in any way mean that the real estate cannot be used again by other means (e.g. by renting, leasing or other) for the purpose of the business activity, quite to the contrary.
Methodologies and points for attention
The reasons for disposing of real estate can be very diverse, and there are even more methods to achieve this. However, essentially real estate is transferred either in exchange for money or shares. In the latter case, shares are often just an intermediate step and in time these will again be converted into money.
The fact that the methods can be highly diverse is due to the numerous legal, financial, fiscal (and accountancy) considerations. A number of fiscal considerations are explored below.
If the real estate that one wants to dispose of represents a major latent capital gain, then the first aim must be to minimise the resulting tax burden. After all, such a disposal will in principle incur a corporate tax liability of 33.99%. Sometimes this tax liability can be spread over time. On the other hand, via various forms of transfer – for example, to a Belgian listed real estate investment fund (Bevak or Sicafi) - the tax burden can be reduced to 16.995%. In other instances there may not be any tax liability at all, but this must then be a case of tax-free restructuring regulated by Belgian tax law. However, the Belgian tax authorities – via the ruling commission – will then often impose additional terms (i.e. prohibition to sell – for a certain period – the shares received in exchange) which have to help to underline the presence of legitimate economic or financial needs (and therefore the absence of purely fiscal motives). In this respect, the adjustment of the Belgian tax legislation to the European legislation at the end of 2008 as well as recent case law leave us some hope that the ruling commission might in the future take a more flexible stance. However, this remains to be seen.
If the transfer of real estate is not subject to VAT, it will trigger – unless in case of tax-free restructuring - a registration duty of 10% (Flemish Region) or 12.5% (Brussels and Walloon Region). A transfer by establishing a leasehold right or a so-called split sale will reduce the bill however quite considerably.
If the transfer of real estate is not subject to VAT, one will also have to verify whether there is not a risk that the VAT, which has in the past (e.g. at the time of construction) been deducted, does not have to be paid back by the transferor to the Belgian state.
Furthermore, one will also have to consider to what extent the real estate can again be made available to the company by means of a so-called (whether or not flexible) VAT – lease.
Finally, the Belgian and international accountancy rules (IFRS, USGAAP) are also not to be ignored. Application of the (Belgian) accountancy rules can result in the real estate, despite it being sold, still featuring on the transferor’s balance sheet. This is the case with a so-called sale and leaseback transaction (contrary to a sale and rent back transaction). Notwithstanding the accountancy rules, Belgian tax rules do recognise such a transfer.
The current credit crunch has once again focused attention on one particular transaction: the transfer of real estate to a listed Belgian real estate investment fund (Bevak or Sicafi) in exchange for shares. It is a good deal for the investment fund, because its level of debt reduces as a result. In exchange, the transferor receives shares in a large and diversified real estate investment fund. Moreover, the latter can also subsequently sell the shares (on the stock market) and thus generate cash. Cash, which can subsequently be used for financing the company’s own business activities.
Finally, one should also not lose sight of the fiscal consequences for the shareholders (companies or natural persons or non-profit organisations). This is worth exploring in depth, especially for transactions involving a Belgian real estate investment fund. This aspect is covered more extensively elsewhere in this newspaper.
Letting go off real estate is, as it appears, all in all a fairly complex matter. Timely preparation is absolutely essential. Yes, even at the time of acquisition it is wise to give some thought to the most optimum way of structuring to ensure that ultimate outsourcing, if required, can take place smoothly. Flexibility is and remains the key!
For further information on this topic please contact Luc Spincemaille at Tiberghien (in cooperation with ALTIUS) by telephone (+32 2 773 40 00 ) or by fax (+32 2 773 40 55) or by email ([email protected]).
Outsourcing often conceals widely varying realities:
- a company shareholder may want to divide his corporate assets among his future heirs. The 'active' heirs will participate in the business, whereas the 'passive' heirs will be involved in the real estate undertaking. In practice, this then often leads to a split between the business activity and the real estate.
- a company may want to improve its cash-flow position and therefore decides to dispose of real estate.
- shareholders may decide to sell their company, but note that a sale is easier to achieve if the real estate issue is settled first.
- a company may want to offer a real estate business already operating within the company the opportunity – by means of a spin-off – to develop faster and thus to grow into a real estate company in its own right.
- a company may want to increasingly focus exclusively on its core activities; if the real estate is not part of this it will be put up for sale.
- etc.
However, disposing of real estate does not in any way mean that the real estate cannot be used again by other means (e.g. by renting, leasing or other) for the purpose of the business activity, quite to the contrary.
Methodologies and points for attention
The reasons for disposing of real estate can be very diverse, and there are even more methods to achieve this. However, essentially real estate is transferred either in exchange for money or shares. In the latter case, shares are often just an intermediate step and in time these will again be converted into money.
The fact that the methods can be highly diverse is due to the numerous legal, financial, fiscal (and accountancy) considerations. A number of fiscal considerations are explored below.
If the real estate that one wants to dispose of represents a major latent capital gain, then the first aim must be to minimise the resulting tax burden. After all, such a disposal will in principle incur a corporate tax liability of 33.99%. Sometimes this tax liability can be spread over time. On the other hand, via various forms of transfer – for example, to a Belgian listed real estate investment fund (Bevak or Sicafi) - the tax burden can be reduced to 16.995%. In other instances there may not be any tax liability at all, but this must then be a case of tax-free restructuring regulated by Belgian tax law. However, the Belgian tax authorities – via the ruling commission – will then often impose additional terms (i.e. prohibition to sell – for a certain period – the shares received in exchange) which have to help to underline the presence of legitimate economic or financial needs (and therefore the absence of purely fiscal motives). In this respect, the adjustment of the Belgian tax legislation to the European legislation at the end of 2008 as well as recent case law leave us some hope that the ruling commission might in the future take a more flexible stance. However, this remains to be seen.
If the transfer of real estate is not subject to VAT, it will trigger – unless in case of tax-free restructuring - a registration duty of 10% (Flemish Region) or 12.5% (Brussels and Walloon Region). A transfer by establishing a leasehold right or a so-called split sale will reduce the bill however quite considerably.
If the transfer of real estate is not subject to VAT, one will also have to verify whether there is not a risk that the VAT, which has in the past (e.g. at the time of construction) been deducted, does not have to be paid back by the transferor to the Belgian state.
Furthermore, one will also have to consider to what extent the real estate can again be made available to the company by means of a so-called (whether or not flexible) VAT – lease.
Finally, the Belgian and international accountancy rules (IFRS, USGAAP) are also not to be ignored. Application of the (Belgian) accountancy rules can result in the real estate, despite it being sold, still featuring on the transferor’s balance sheet. This is the case with a so-called sale and leaseback transaction (contrary to a sale and rent back transaction). Notwithstanding the accountancy rules, Belgian tax rules do recognise such a transfer.
The current credit crunch has once again focused attention on one particular transaction: the transfer of real estate to a listed Belgian real estate investment fund (Bevak or Sicafi) in exchange for shares. It is a good deal for the investment fund, because its level of debt reduces as a result. In exchange, the transferor receives shares in a large and diversified real estate investment fund. Moreover, the latter can also subsequently sell the shares (on the stock market) and thus generate cash. Cash, which can subsequently be used for financing the company’s own business activities.
Finally, one should also not lose sight of the fiscal consequences for the shareholders (companies or natural persons or non-profit organisations). This is worth exploring in depth, especially for transactions involving a Belgian real estate investment fund. This aspect is covered more extensively elsewhere in this newspaper.
Letting go off real estate is, as it appears, all in all a fairly complex matter. Timely preparation is absolutely essential. Yes, even at the time of acquisition it is wise to give some thought to the most optimum way of structuring to ensure that ultimate outsourcing, if required, can take place smoothly. Flexibility is and remains the key!
For further information on this topic please contact Luc Spincemaille at Tiberghien (in cooperation with ALTIUS) by telephone (+32 2 773 40 00 ) or by fax (+32 2 773 40 55) or by email ([email protected]).
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