Has the decrease in Flemish sales duty led to an increase in the costs for purchases of usufruct?

The decrease in sales duty: also for split purchase usufruct-bare ownership
The recent drop in the rate (to 7.00%) for purchases of family homes comes with a number of conditions. For example, the purchaser must be a natural person. Following some uncertainty, it was subsequently confirmed that, in the event of a split purchase of such a property by a company for the usufruct and the bare owner for the bare ownership, the bare owner can still benefit from the 7.00% rate, provided that the other conditions are met. Usufructuary-companies must pay 10.00% sales duty.

The importance of fixed valuation rules
Article 2.9.3.0.1 of the Flemish Tax Code summarises a basic rule of the sales duty. Specifically, the sales duty is determined on the basis of the amount of the agreed price, with the sales value of the property as the absolute lower limit. In short, the price must be compared with the objective market value of the property. The tax is then levied to the higher of the two. If the price is higher than the market value, the property will be valued on the price. If the market value is higher than the price, the price itself will not be adjusted, but taxes are still levied on the higher market value.

The market value of full ownership can be determined by using comparable references. In the case of usufruct, this is a much more complicated story. Indeed, not only do you have to find comparable properties, but they also need to be taxed with the usufruct for the same duration as the property to be valued. It goes without saying that, despite the popularity of usufruct, this is a practically impossible exercise.

For this reason, the legislator has already taken measures for some time, and has provided for a fixed valuation method for usufruct (Article 2.9.3.0.4. of the Flemish Tax Code). As a result, the usufruct is calculated on the basis of the current value of the expected income stream from the usufruct, fictively calculated using the rental value. Then there are a number of restrictions and special rules, which we are not going to cover in detail here. The value of the bare ownership is then estimated as the difference between the value of the full ownership and the value of the usufruct thus calculated.

With the evolution and the advancing insight into the valuation of usufruct, it should be stated that this fixed value is generally higher than the economically calculated value. In concrete terms, this means, based on the main rule, that if the fixed value is higher than the economic value, the sales duties are calculated on the higher fixed value. As such, more sales duty has to be paid than just 10.00% on the price of the usufruct. That is why, in a deed of usufruct, the rental value must invariably be indicated in the pro fisco declaration, so that Vlabel is able to calculate this fixed value. 

Split purchase usufruct-bare ownership: the main rule remains a dead letter
In the case of a split purchase, in which full ownership is acquired, albeit split for bare ownership by party A and usufruct by party B, this rule has been abandoned in practice. Indeed, the full ownership is transferred (and valued) in full, so Vlabel is satisfied (provided, of course, that the sum of the usufruct and bare ownership values used is at least equal to the objective market value of the full ownership).

However, this supposes that both disposals are subject to the same rate. If this is not the case, e.g. because one of the disposals is subject to the right of distribution, the Administration will only apply the fixed valuation system if it has an interest due to the different rate system.

Does the rate decrease create a new fire in the saga of usufruct valuation?
This approach had fallen under a thick layer of dust as the 10.00% rate was applicable for a long time to both usufruct and bare ownership. The new rate decrease, which in the best case only applies to bare ownership but never to usufruct, establishes a differentiation in the rate between usufruct and bare ownership. As such, Vlabel may have an interest in checking the mutual distribution of value between usufruct and bare ownership. Indeed, if the usufruct needed to be valued higher than the transaction price and the bare ownership lower, more could be taxed at 10.00% and less at 7.00%.

Returning to the above, it could be argued that both usufruct and bare ownership each need to be valued separately at a fixed rate. Both usufruct and bare ownership are then taxed separately, each for itself on the transaction price or on the fixed value, if this was higher. Bearing in mind that it would have to be extremely coincidental for the transaction price for usufruct or bare ownership respectively to be exactly equal to their fixed value, this is always disadvantageous for taxpayers.

A straightforward example clearly illustrates this:
Suppose the value of full ownership is 100, and the economic value of usufruct is 60 and that of bare ownership is 40. The fixed values of usufruct and bare ownership are 70 and 30 respectively per hypothesis. In a strict application of the above rule, the usufruct would be valued at 70 (the highest of the economic value of 60 and the fixed value of 70) and bare ownership at 40 (the highest of the economic value of 40 and the fixed value of 30). The joint tax basis would therefore be 110, which is more than the value of the full ownership (100).

Given that it will very rarely happen that the economic value equals the fixed value, an increase in the consolidated tax basis would almost always be applicable in the case of split purchase usufruct-bare ownership. The costs would therefore be increased (on the other hand, a discount of 3.00% is gained on the bare ownership compared with before). 

Vlabel puts out the fire
When questioned on this, Vlabel stated, in an (as yet) unpublished decision, that it will not apply the rule of separate (fixed) valuation of usufruct and bare ownership if the transaction prices of usufruct and bare ownership together are at least equal to the objective market value of the full ownership. As such, it has put out the new fire in the usufruct valuation before it can flare up in full.

The above fixed valuation rule should therefore not be applied to the split purchase of full ownership. Nor should the rental value be included in the pro fisco declaration. As was the case previously, the fixed valuations then only remain important for situations in which usufruct or bare ownership are transferred separately. Although Vlabel has recently been under fire for its ideas which have been detrimental to taxpayers, they are showing a very human side here, and are sweeping the literal application of the law neatly under the carpet.

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