Discrimination as regards the benefit in kind for housing has been highlighted on several occasions. Specifically, it relates to the unequal treatment of the same benefits, whether in terms of provision by a sole trader or provision by a legal person. In the most common cases, the benefit arising from being a limited company is almost four times more expensive taxation-wise than the benefit arising from being a sole trader.
Discussion of the discrimination between benefits in kind for housing
The courts of appeal of Antwerp and Ghent have already ruled on several occasions that such distinction is not justified and that, consequently, the lower benefit in kind (of the sole trader) must also be applied for limited companies. In concrete terms, this means that a multiplication factor of 1 must be taken into account, not a factor of 3.8. As a result, most benefits in kind suddenly become four times cheaper.
For a long time, the tax authorities stoically remained within the rather destructive case-law, and the number of cases brought before these courts continued to increase. In comparison with other discussions, everyone expected that the legal benefit in kind of sole traders and limited companies would be harmonised by the legislator, but at the level of the highest benefit in kind (factor 3.8). That way, discrimination would also be eliminated and the Treasury would not be disadvantaged.
Perhaps the tax authorities would leave it at that and give everyone a break?
However, the Minister of Finance recently threw in the towel. Legislative measures were immediately announced, with the understanding that, according to the initial reports, the expected increase to a factor of 3.8 would not happen after all. The media - in the absence of an official position - even alluded to the fact that the benefits in kind might be reduced. The Minister himself referred to 'unrealistic benefits in kind' and the need to make overall reductions following increases under the Di Rupo government.
In practice, an overall reduction to a factor of 1 (which possibly seemed to be on the way following the Minister's first statements) would mean that almost all benefits in kind would be decimated to a quarter of their current value, meaning that in many cases, cupboards in villas would be a benefit in kind, equivalent, as it were, to the rental price of a typical home. Although this would be a welcome change for entrepreneurs and the middle classes, it seems a little too much of a good thing, and therefore unlikely to last long. With such a twist, it is more than likely that this regulation will one day - and probably at lightning speed - end up on the legislative drawing board. There are two disadvantages in this respect:
- It will give rise to new discussions, bearing in mind that disputes are always detrimental and that this area clearly suffers taxation-wise (partly unjustifiably);
- Real estate planning is generally planning for the long-term; however, it is made more difficult if it is known in advance that the current regulations are not stable and may therefore change.
Such regulation in fits and starts, like the fickle regulation relating to car taxation, is therefore not really the best display of professional and stable regulation.
Here we go again
In the media (E. Cleeren, “Kraai niet te snel victorie over villa op kosten van de zaak”, Tijd 31 March 2018, p. 33-34) it was reported that the Minister now appears to be taking action. More specifically, according to the Minister, this issue should be examined by his administration, presumably because of the same concerns as mentioned above. Is this missed tax reduction, by definition, a bad thing for entrepreneurs? Depending on the outcome, this does not seem to be the case, as overtly advantageous rates would only be the prelude to more debate and uncertainty. We can cautiously state that it is already rather positive that the debate will be settled before rather than after the facts.
What can taxpayers expect?
A first idea is that the current system of 'cadastral incomes' as a basis for benefits in kind is completely outdated. Indeed, the benefits in kind differ too much from one another, meaning that comparable properties may still have a different cadastral income, depending on region, age, etc. Re-estimating all cadastral income is easier said than done. First of all, a site visit would be required for all the plots in the country, and there are many of them. However, this exercise would take on almost mythical proportions, and as such would only appear to be possible in theory. Moreover, the effect of a re-estimation is also politically charged, as everyone can be affected. For example, doubling a cadastral income also means doubling property tax, which could be too expensive for the owner of a small terraced home, for example. The emotion surrounding the new 'klein beschrijf' rules already shows how heavy this weighs in electoral terms. In addition, as regards 'klein beschrijf', prospective buyers, after creating their account, can still cancel the purchase. With property tax, the taxpayer is already the owner of the property, and usually has little or no fall-back options. Such measures, especially just before elections, are not therefore a realistic possibility in the short term. Of course, the decision could also be postponed until after the elections to some extent. Given the case law, the question is whether people can wait that long.
A second idea could be to completely separate the system from cadastral incomes, to continue to focus purely on the benefit in kind, without other collateral damage. For example, one option could be to use the real rental value. However, this is even more radical in technical terms, and could result in even more discussion (what is the real rental value?). In the short term then, it is probably not on the way, but we should not rule out working towards this option in the longer term.
The only alternative available in the short term is probably to tweak the existing cadastral income-based formula. A levelling-off to factor 3.8 across the board had been expected for a long time, but this now no longer seems to be the case in light of the Minister's statements. A general recourse to a factor of 1 would probably also be too much of a good thing, as explained above. A return to a factor of 2, the system prior to Di Rupo, may be the most realistic and also the most politically meaningful signal. In any case, it remains to be seen what the final verdict will be.
How can we avoid a 'crash and burn' scenario?
The guiding principle for future projects is consequently the following:
- Wait and see what the official position is;
- Don't hope for a very low benefit in kind ('factor of 1' instead of 3.8);
- In the long run, prepare for a complete reform of the benefit in kind (e.g. based on real rental value).
In the meantime, the focus will probably remain on the problem of the deduction for the associated costs, the so-called remuneration theory. Indeed, this is much easier for the tax authorities, as it is more of a legal problem, and much less factual or large-scale. Two observations can be made from the point of view of taxpayers:
- First, make a good analysis of a case, in which it is examined whether this remuneration theory is applicable at all; if so, then the case must be proactively substantiated to avoid ending up in the emotional mincer of recent case law;
- Emotionally and conceptually, non-deductibility is difficult for taxpayers to swallow, while there is more to gain in financial and analytical terms with non-deductible costs, especially in view of the reduction in corporate tax rates, if these are linked to a low benefit in kind.
In any case, we should keep a sufficiently broad view and not focus on the benefit in kind alone. After all, real estate planning and taxation are in a maturing process, as evidenced by the evolution in the valuation of usufruct, among other things. It is the end of an era in which everyone can come up with standard solutions for the situation in each individual and unique case. Many questions need to be answered, including:
- what interest does the company have in the transaction?;
- why opt for a right of usufruct, long-term lease, etc., instead of an alternative?;
- Has my right in rem been correctly evaluated?
1. Be careful with the parameters: a clear shift in real estate is noticeable (sometimes very local and segment-related) meaning that we should guard against making too simplistic generalisations or too simple parameters;
2. the issue of the valuation method is also a point in itself;
- can the tax deduction be justified in theory and, consequently, how can the case best be substantiated in practice?;
- How can work fit into private use? New ideas are being created and are needed to plan for the future (survival of the fittest).
Focusing only on the evolution of the benefit in kind results in an overly narrow field of vision. Indeed, any reasoning is then far too short-term, and omits most of the key points. As such, a healthy commercial approach, accompanied by extensive technical knowledge, is more than ever an absolute necessity for preventing problems rather than curing them.