The business succession facility (BOF) is by far the largest exemption under inheritance and gift tax (see also our article Gift tax exemptions). In order to benefit from this high exemption, a number of strict conditions must be met.
BOF
The BOF applies, in respect of both inheritance tax and gift tax, to:
– assets belonging to an income tax company;
– shares representing a significant interest in a company, in so far as that company carries on a material business.
Insofar as the value of the business is less than €1,060,298, the acquisition is for 100% exempt. Of the portion of the value exceeding €1,060,298, 83% exempt. For the portion of the value of the acquisition of business assets or shares that is not covered by the exemption, a 10-year deferral of payment may be granted.
It is therefore well worth taking the time to structure companies, wills and similar arrangements in such a way as to derive the maximum benefit from the BOF.
Continuation
An important condition for the application of the BOF is that the acquired business or shares may not be disposed of for at least five years following the acquisition. For inheritance or gift tax to which the BOF applies, a so-called ‘conservatory assessment’ is issued. As soon as the retention requirement is breached, this provisional assessment is recovered by the Tax and Customs Administration. Once the five-year period has elapsed without any breach of the retention requirement, the provisional assessment is reduced to zero.
Strictly
The continuation requirement is strictly enforced. Only a number of transactions specifically listed in the implementing regulations may be carried out within the five-year period without incurring inheritance and/or gift tax retrospectively. The fact that there is little leeway here was demonstrated in a recent Committee on Petitions and Citizens’ Initiatives a matter considered by the House of Representatives.
The case concerned a father married under the community of property regime, whose wife had died in 2012. In that connection, he acquired 50% of the shares in a private limited company (B.V.) that formed part of the matrimonial community. The BOF was applied to this acquisition for the purposes of inheritance tax.
In 2015, the father wished to gift all the shares in the private limited company to his son. The Tax and Customs Administration subsequently took the view that the BOF applied in connection with the mother’s death was reversed because the continuation requirement had not been met. Furthermore, the BOF could not be applied to the gift to the son. This is because a condition for applying the BOF to a gift is that the donor must have held the shares in question for at least five years prior to the gift.
The BOF could, however, be applied to the gift of the 50% shares, which, under matrimonial property law, had always been held by the father.
Stakeholders then invoked the so-called hardness clause. However, the State Secretary for Finance dismissed that appeal on the grounds that there was no question of a significant injustice (there was no consequence which the legislator would have sought to prevent had he foreseen it when drafting the Act).
The House of Representatives’ Committee on Petitions and Citizens’ Initiatives confirms the State Secretary’s view.