Inheritance of family businesses in the Flemish Region: elimination of the employment condition in order to guarantee the continuity of family companies and businesses

Inheritance of family businesses in the Flemish Region: elimination of the employment condition in order to guarantee the continuity of family companies and businesses

Since 1999, family businesses can descend free of estate taxes to the heirs (who need not necessarily be the children or family members), if a number of conditions have been met (art. 60bis of the Wet Successierechten Vlaamse Gewest [Flemish Region Estate Tax Law], hereafter referred to as ´W.Succ.Vl.Gew.´). One of these is the so-called “employment condition”.

The current employment condition requires that, in the three-year period prior to the death, an amount of at least 500,000 EUR must have been paid out in labour costs to employees in the European Economic Area. The employment in the company must also remain assured during a period of five years after the death of the testator. The current condition of labour costs in the European Economic Area was introduced to replace the condition of employment of five employees in the Flemish Region, and this in response to the decision of the European Court of Justice (25 October 2007, C-464/05, Geurts-Vogten).

In the Policy Memorandum Finance and Budget 2009-2014, the Flemish Minister of Finance, Philippe Muyters, is now proposing to eliminate the employment condition entirely. Nevertheless, the policy memorandum does not have the force of law. The new regulation would only become definitive when it is incorporated into a decree.

One of the reasons given for abolishing the employment condition is to improve the survival chances of companies in times of economic crisis. Moreover, according to the policy memorandum, the current labour costs condition is proving more difficult to apply in practice than the (earlier) condition of having five employees employed in the Flemish Region.

The beneficial regime would enter into force with retroactive effect. Through the third quarter of 2011 (both before and after the death) a transitional measure is provided so that all companies affected by the crisis are treated in the same way with respect to the attribution of the exemption from estate taxes:

- New requests will be assessed without taking account of the labour costs condition;

- With regard to already-approved requests, it is provided that entrepreneurs who had to or have to cut labour costs due to the crisis will have no additional assessments imposed if they no longer fulfil the conditions.

The retroactive effect of the beneficial regime would not apply for the heirs who at that time precisely because of the employment condition waived application of the exemption rule in article 60bis W.Succ.Vl.Gew. In our opinion, the beneficial arrangement should also be extended to such heirs, e.g. by granting them the possibility to revise their choice.

Finally, the policy memorandum mentions that the elimination of the employment condition will be evaluated in mid-2011. At the time of this evaluation, the maintenance and the size of the exemption might be coupled to an easily verifiable component linked to the concrete activity within the company.

The current exemption arrangement does not provide for any activity condition, as a result of which holding companies too can qualify for the exemption. The tax administration states explicitly in its Circular of 30 April 2004 (Belgian Official Gazette, 19 August 2004) that the tax subject has the choice: the application of inter alia the employment condition as provided in article 60bis W.Succ.Vl.Gew. either at the level of the holding company or at the level of the underlying subsidiaries.

Concretely this means that, under the current exemption arrangement, the shares of certain companies of the group, which themselves do not satisfy inter alia the employment condition and which are also not "operating companies", such as asset management companies, nevertheless can be inherited free of estate taxes if these shares are held via a holding company which does fulfil the employment condition and the other conditions provided for in article 60bis W.Succ.Vl.Gew.

Should the exemption in the future actually be linked to an activity condition, the concrete impact will depend on the description of the required activities, since the question arises whether an operating activity (industrial, commercial, handicraft or agricultural activity) would be required, or whether the exercise of a holding activity (the management, holding, acquisition, … of participating interests, among other things) would suffice to qualify for the exemption arrangement.

For more information: romina.abiuso@tiberghien.com and robby.ackermans@tiberghien.com