Superficies as stealth usufruct?

A noteworthy judgement was recently handed down by the Court of Appeal of Brussels regarding the taxation of overly cheap accession in the case of superficies (23 January 2019). In the past, a number of rulings had already been made on this subject (see, inter alia, Court in Ghent of 31 October 2017). The tax authorities are clearly keen to see the end of the right of superficies, and the two judgements also show that there is sometimes a clear difference in depth (and that the end point is a long way away).

Facts of the judgement
The judgement reads smoothly, and is characterised by both a very animated account of the facts and lively legal questions. This contribution focuses on one aspect in particular. The facts of the case (somewhat simplified where possible) were as follows: the director of a company had acquired a plot of industrial land privately for just under €40,000. Two years later, a right of superficies for this land was granted by the director to his company. The right of superficies was granted for fifteen years. At the time the right of superficies was established, the intention was that the superficiary (the company) would construct a building on the land and that this building would be transferred to the proprietor free of charge at the end of the right of superficies. This was also registered as such in the superficies agreement. More specifically, it was agreed from the outset which building would be constructed, and this was specified in the superficies agreement. In addition, this agreement contained the contractual requirement for the superficiary not to demolish the buildings.

No sooner said (or rather written) than done, the landowner became full owner of the land and building for free, at the end of the right of superficies. Prior to that, he had already sold his shares in the company to a third party and had terminated his director's mandate. A few months after this free acquisition, the owner sold the land and building to the same company for approximately €600,000. However, the tax authorities intervened, claiming that the (former) director had granted himself a benefit and consequently taxed the (former) director at the value of the building (in this case €411,000). The taxpayer contested the assessment and went to court. At the Court of First Instance, the taxpayer was unable to win his case. The daggers were therefore drawn again before the Court of Appeal.

Benefit in kind?
In this case, the existence of a benefit in kind was the subject of a comprehensive and fascinating debate. It related both to the existence of a benefit, the amount of the benefit and the requirement of a necessary link with the mandate as director (all the more so since the director was no longer in his duties on the date of accession). All these elements merit a discussion in themselves, but this would lead us too far on a tangent.

The Court ruled that the former director did indeed enjoy a benefit in kind, by simply highlighting the fact that the superficies agreement would never have taken place between two independent parties. In its argumentation, the Court refers, among other things, to the relatively short duration of the right of superficies (15 years), the non-existent accession fee, and the annual canon paid by the superficiary (which, according to the Court, was relatively high and therefore constituted an adequate compensation for the relinquishment of the right to use the land). Despite various classic counter-arguments from the taxpayer, including a few clever ones, he was still unable to turn the tide.

The eye catcher of the judgement: the moment of taxability
Up until now, the majority of jurisprudence and legal doctrine has assumed that the moment of taxability of the benefit in kind (if any) falls at the moment when the right of superficies ends, in other words at the moment when the construction works are carried out free of charge or are carried out for too low a fee. The notion is that this is the moment of the civil-law accession. The tax law does not provide explicit clarity in this regard. The tax law only specifies that 'benefits' are taxed, leaving the specific interpretation of such benefits fully open.

We have also never shared the seemingly widespread reflex of seeing the property law-based accession as a benchmark date for the tax assessment. An example of lease may suggest that the benefits often lie in the contractual sphere (contract law) rather than in accession (property law). Imagine, for example, a fifteen-year lease has already been in place for ten years and the initial real estate of €1,000,000 is now worth €1,500,000. From experience, we see that most people intuitively attribute the capital gains to the lessor, as owner of the property. However, the lessee has an agreement with the lessor, which states that they become the full owner of the property (and can therefore get hold of the capital gain) provided that the remaining lease continues until expiry and the purchase option is exercised. The capital gain therefore accrues to the lessee, since he or she can claim it entirely for him or herself, 'only' by meeting their financial obligations, which are fixed and not affected by the increase in value. In other words, if the lease contract is transferred ('sold') to third parties as a going concern, the contract is extremely valuable and the lessee will receive significant compensation for it (to compensate for the relinquished capital gains). The economic advantage is therefore clearly in the contractual provisions and not in any property law phenomenon.

In the same way, for certain superficies agreements it can be stated that the benefit does not arise at the end of the right of superficies, but that the benefit has already arisen at the time of the establishment of the superficies agreement. In other words, the advantage gained by the proprietor stems from the good negotiations he or she conducted when establishing the right of superficies rather than from the eventual free accession. The profit (without this having to be unfair) is already banked by the proprietor within day one of the superficies agreement. This was clearly the situation in this case, as there was obviously an agreement to construct a specific building, and not relinquish it after 15 years. The Brussels Court of Appeal therefore applied this reasoning in its judgement of 23 January 2019, as a result of which the taxpayer could no longer be taxed on the benefit in kind that came with the free accession. Indeed, the benefit was granted at the start of the agreement and consequently the tax authorities assessed the wrong year (whereby the correct taxable period had, of course, already long expired).

Several important nuances
The above reasoning should be nuanced, and clearly cannot be applied to all cases. One of the main reasons why the Court of Justice decided in this case that the benefits had already occurred when the superficies agreement was established is that the agreement expressly provided that the superficiary had to construct a building during the period of the right of superficies (in addition to a prohibition on demolishing it, although this seems less decisive, since the superficiary has everything to lose and nothing to gain from the destruction of value (if only the demolition costs)). More specifically, in this case, building plans were already available at the time of the establishment of the right of superficies, which the parties agreed on, making it actually possible to estimate the benefit for the proprietor at the time. In other words, it was clear from day 1 that the superficiary had committed to something that an independent player would never have agreed to. In order to be fairly balanced economically, the duration of the right of superficies (as a recoup period for the superficiary) must be longer and/or there must be an accession compensation in favour of the superficiary to cover the part of the investment not yet recouped.

Once again (see the Ghent judgement), it is striking that the Court approaches the matter in conceptual terms. For an expert in the field, it is suspicious that there is not even a calculation involved. Although, in this case, this probably would not have changed the final judgement, that a tax benefit does exist, regardless of the calculation of the benefit, it is rather one-sided to quantify the benefit as the value of the buildings (again resurfacing in the intuitive reflex to refer to property law, this time the suppletive regulation that the 'normal' accession fee is equal to the value of the buildings at the end date of the right of superficies). Temporal aspects need to be taken into account, as well as the benefits that the superficiary enjoyed himself and alternative benefits, beyond the right of superficies, that the proprietor has foregone. The judgement is therefore a step forward, although the end point in the superficies saga is still a long way away.

In the opposite situation (i.e. where there is no concrete intention to build) it is difficult to state that the benefit has already arisen at the time the right of superficies was established, since the original superficies agreement does not yet refer to buildings to be constructed. It will therefore always be important to stipulate in the agreement that the superficiary will erect a building. In addition, it also seems advisable (as in this case) to already have concrete construction plans, or make certain cost price agreements regarding the buildings to be constructed.

As such, it becomes extremely factual to judge when a benefit has been obtained. For the time being, one example is enough to suggest this. A superficies contract is concluded between related parties and it is agreed not to pay any accession fee at the end of the superficies (by the proprietor to the superficiary) nor to pay a solarium (= rent of the land, by the superficiary to the proprietor). At the start of the right of superficies, no construction has yet commenced and there is no agreement on a building project of any kind or scale. It can be objected that the superficiary has already provided a benefit at this point. Indeed, the superficies does not oblige him or her to do anything. Conversely, the proprietor is at a disadvantage, given that he or she has made their land unavailable for a longer period of time, they do not get a solarium for it, and they are not sure that this will ever be compensated by the accession of valuable constructions. If at some point the superficiary decides to build - of their own accord - and the (remaining) duration of the superficiary is assumed to be too short to recoup the investment (in the broadest sense of the word), there could be a situation of a benefit at that point.

Planning with fiscal stealth technology?
One swallow, or one judgement of the Court of Appeal, does not make a spring. Nevertheless, the arguments of the Court seem convincing. Of course, this immediately throws a spanner in the works for the tax authorities. A holy house of simplicity is razed to the ground. Usufruct is checked at the start (valuation) and at the end (accession of any works carried out by the usufructuary). In the meantime, the tax authorities can put this to one side without any worries. Superficies is only checked at the end. Prior to this, the tax authorities may look the other way without noticing taxable elements.

In the above reasoning, however, the tax authorities need to check each superficies every year. Data mining under scrutiny. The chance that you, as a taxpayer, will dodge the bullet as a result of the statute of limitations suddenly becomes much greater. Especially in the short term - since it may take some time before the tax authorities accept the position, if they ever will, and adjust their modus operandi - it is therefore advisable to include such clauses in your contract. After all, there is a good chance that your case is already statute-barred before the tax authorities switch tactics. Undoubtedly to be continued...

Revival of superficies?
Taxation is often a case of action-reaction. The reader will probably think that many people will feel tempted to opt for superficies instead of, for example, usufruct. However, such pierceable reflexes are seldom the best idea.

Nonetheless, even usufruct advocates may suddenly give in to the charms of superficies in specific cases. A civil-law (and fiscal) debate is underway or in the pipeline as to whether the split construction of a new build in usufruct-bare ownership is possible. For professional new build, usufruct contains a VAT bug. The bare owner also pays part of the new build and cannot deduct the VAT. By switching to superficies, in which the superficies is modelled on the example of usufruct (i.e. possibly without the accession fee, without this being a tax advantage), the VAT deduction can be increased to 100%. Even with a rather basic warehouse, this already means a benefit of at least €10,000, let alone when the premises get bigger. Superficies can also lead to a strong pressure on the contribution of the bare owner (subject to conditions), up to 8% savings on registration fees, better use of the spread taxation on capital gains, etc. The list of benefits is long, but conditional, and outright fiscal opportunism is as always frowned upon.

Conclusion
The decision is that it is time to rediscover the charms of superficies. After all, there are sometimes attractive advantages compared to the alternatives, depending on the specific case. We do however need to be cautious. Usufruct is fiscally polished and comes with few surprises. Superficies and emphyteusis are much more complex (fiscally), and the possible dangers of these have not even been addressed yet in this article. For the unprepared or uninitiated, there is a significant danger that the search for optimisation opens Pandora's box and also leads to tax disadvantages, which far outweigh the hoped-for benefits.

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