The Supreme Court has, in a judgement of 15 April 2016 confirmed that the business succession scheme (BOF) under inheritance and gift tax legislation can be applied to the acquisition of shares in a property company. We describe this extremely generous business succession scheme in our factsheet on gift tax exemptions.
Tangible business
The name of the facility says it all: it must be a company. The main condition for the application of the business succession scheme is therefore that (part of) a tangible business is bequeathed or gifted. Another important condition is also reflected in the name of the scheme: it must concern succession. You can read about this condition in our article BOF’s demand for continuation is uncompromising.
Property
The operation of property is not usually carried out in the form of a business. After all, property is often held as an investment. The Supreme Court has now confirmed that, under certain circumstances, the operation of property may constitute a material business. The relevant criteria for this are set out in the judgment confirmed by the Supreme Court in Arnhem-Leeuwarden Court of Appeal.
According to this Court, an undertaking is: a sustainable organisation of labour and capital, aimed at participating in society, with the objective of making a profit. With regard to the operation of property, this is further defined by the requirement that it must be demonstrated that:
– the work carried out in relation to the property, in terms of its nature and scope, goes beyond normal asset management;
– with the aim of achieving a higher return than with standard asset management.
Burden of proof
The party invoking the business succession scheme must prove that the operation of the property qualifies as a material business. This proof will have to be provided in each individual case on the basis of the specific facts and circumstances at each separate point in time when the business succession scheme is invoked.
The Tax and Customs Administration can sit back and relax. In practice, this is exactly what it does by requiring (whether justified or not) a highly detailed substantiation of a claim under the business succession scheme in the form of the so-called ‘catalogue of circumstances’.
The Arnhem-Leeuwarden Court of Appeal did, however, rule that not only the direct return (i.e. the rent less the costs), but also the indirect return (i.e. the increase in the property’s value) must be taken into account. The Tax and Customs Administration argued that only the direct return was relevant.
According to the Court, when assessing the nature and extent of the work involved in the operation of the property, one must not look solely at the company’s own employees. This also includes outsourced work that is supervised and the work of external experts hired on a project basis.
Income tax
The concept of a ‘material undertaking’ is not only relevant to inheritance and gift tax. Where the shares in the property company qualify as a substantial interest, the carry-forward of the income tax claim can only take place to the extent that the company carries on a material business.
Transfer tax
In addition to inheritance and gift tax and income tax, transfer tax may be payable on the transfer of shares in a property company. This is the case when the shares are treated for tax purposes as immovable property.