From 1 May 2019, new legislative rules will apply for Belgian companies and associations.
On 28 February, the Belgian House of Representatives adopted a bill for a new Code on Companies & Associations. The aim? To modernise the current legal framework, align more closely with reality and help make Belgian companies more competitive in relation to their European colleagues.
The aim? To modernise the current legal framework, align more closely with reality and help make Belgian companies more competitive in relation to their European colleagues. The new legislation will enter into force from 1 May 2019 for new companies and associations and 1 January 2020 for all existing companies and associations (unless these opt in before that date). Mass conversion is likely to occur between 2020 and 2023. All existing companies and associations must use this period to review their articles of association and legal status.
The new rules would normally have entered into force on 1 January, but the bill's adoption was delayed by the government shenanigans in recent months (Prime Minister Michel submitted his government's resignation on 18 December 2018 after a Green-Red vote of no confidence, ed.). Although the new legislation has been approved by the House, it hasn't yet been published in the Belgian Official Gazette currently. Also, the implementing decrees will take a little longer. Nevertheless, the new rules will apply as of 1 May this year.
Thinking of buying a property with your company? Take care!
We explain how stricter rules now apply to the "split purchase" of a property obtained via a company. This is a favourable fiscal arrangement for a company director, but one that must be approached with more caution than ever.
The "usufruct/bare ownership" structure
For several years now, the so-called mixed purchase (private/professional) of a property has been common practice for some company directors. This fiscally beneficial solution is based on the principle of "breaking up" full ownership of the property. On one hand, the usufruct is assigned to the company for a certain amount (proportion of the purchase price). This means that the company is entitled to use the property with no rental liabilities during a given period (generally between 20 and 30 years). On the other, the company director acquires bare ownership of the property, which allows him/her to retake full possession of the building once the usufruct has expired without paying a euro more.
The crux of the issue: the valuation of the usufruct
Where is the interest in this arrangement? It lies in maximising the cost to the company of acquiring the usufruct. This is because the larger the sum paid by the company, the smaller the sum the director has to pay at the time of purchase (not forgetting taxes, registration levies, indemnities, etc.). In addition, the company can deduct building/service charges such as withholding tax, maintenance and financial costs, and amortise the value of the usufruct over the agreed term. This is the best possible fiscal scenario, but one that has resulted in a certain amount of abuse at the point of the oft-mentioned "usufruct valuation". It is not by chance then that the tax authorities have been studying the issue for a few years now with a view to tidying things up a little.
The taxman turns the screw even more
Up until now, the authorities used a formula known as the Ruysseveldt formula to calculate the usufruct value, based on the discounted proceeds of gross rental yield for the duration of the usufruct term. However, this approach led to over-valuations, and so did not prove effective enough in the eyes of the tax authorities. This is why they recently decided to apply a new financial appraisal formula which is much tougher. In reality, this is the method already in place since 2016 to assess cases filed with the Service des décisions anticipées (SDA) (advance ruling service) of Federal Public Service Finance. It should be recalled that this service has established a "pre-filing procedure" for usufruct arrangements (used in advance of the official application) to ensure the future operation benefits from a certain degree of legal security.
The "advance ruling" formula is much less favourable
By changing its stance on the issue, the tax authorities could cause problems for some directors who have been too greedy. This is because the two formulae produce rather different results. Take this basic example of a property with a purchase price of EUR 500,000, for which the company acquired the usufruct at a cost of EUR 425,000 under the Ruysseveldt formula (85% of the price). In this case, the director has only paid EUR 75,000 for the bare ownership. Based on the authorities' new approach, the financial valuation of the usufruct would actually sit at around 60%, with bare ownership at around 40%. This means the individual would have had to pay EUR 125,000 more – an altogether different situation.
Handle with care
So any head of a company who wishes to be involved in this kind of operation will need to be more prudent than ever before. One of the most important things is to demonstrate that the arrangement genuinely reflects a financial logic. With this in mind, well-informed entrepreneurs will ensure they prove the property deal will profit the company, and will adequately evaluate the usufruct's value and term. Finally, we should emphasise that approval can be sought from the tax authorities via the fiscal ruling website.
Bank loans: better information for business owners
The 2018 version of the code of conduct on financing SMEs continues the work already done to provide more information to companies, especially with regard to the state-provided mechanisms open to them. These are essential means of overcoming the problem of insufficient guarantees at the point of application.
Why a code of conduct?
This is not a brand new idea, as a first version of this code of conduct was drawn up in 2014 in order to apply the law of 21 December 2013 relating to financing for SMEs. At that time the code already aimed to reconcile banks and business owners seeking credit, in particular by specifying the information to be provided by the banker, the documentation required for the loan application, and the terms of the arrangement. In other words: the business owner had to be in possession of the full facts and placed in a position that allowed them to choose the best possible option and compare credit institutions. Following a review of this legislation, a new version of the law entered into force at the start of 2018, necessitating publication of a suitably updated version of the code of conduct governing the financing of SMEs. This has been in effect since 1 March.
Creating a climate of mutual trust
Loans from banks are an essential financing mechanism that allows companies to start up and grow. This is why it is important to enable business owners to place all the odds in their favour when they make an application. And one way of doing so is by providing a clear picture of all financing options open to them. To achieve this aim, one factor is key: information. It is important when the entrepreneur is completing their application, but it is equally as important once the request has been assessed and then either granted or refused. "Acting in possession of the full facts" also means that the business owner can discuss the matter transparently with their bank's representative and come to view this person more as a "financial partner", especially where an application is rejected and both need to find an alternative solution "together". If this is the case, the objective is clearly to prioritise directing the business owner towards other forms of financing or state guarantees which may underwrite or support the application for a bank loan.
Improving access to financing
The various actors at the table on this issue – Febelfin (Belgian Federation of the Financial Sector) and organisations that represent the self-employed (UNIZO – the union of small entrepreneurs, UCM – the small business owners' network, and SNI – the neutral self-employed union) – have taken concrete steps to reinforce these ideas:
- Provision of the www.financementdesentreprises.be online platform: this gives an overview of the main state guarantees, as well as the support and guidance systems available. This is a reliable tool that provides real support to bank advisors when they need to explain the range of options to their customers.
- Also available on this website are information sheets that explain the most common guarantees and securities and the reasons why these may be required. It should be remembered that the lender has a duty to inform the business owner of all details connected with their application.
- If it is declined, the bank must set out its reasons in writing. The business owner is also entitled to request an explanation (orally or in writing) of the reasons cited by the credit institution.
- The repayment penalty, which is the cost to the company of early repayment of the capital borrowed, was previously limited to a maximum of six months' interest for loans of under EUR 1 million taken out after 10 January 2014; however, the code of conduct has raised this cap, which is now set at EUR 2 million.
Cash flow dipped? Prioritise your payments.
All companies experience highs and lows, especially in terms of liquidity. However, even if you are struggling with cash flow, you must continue to honour your contractual commitments. When it comes to settling with your creditors, it is in your best interest to group them considering two factors: possible fines and your strategic needs.
Several events can temporarily trigger cash-flow problems: a large unexpected payment, a contract which you were banking on falling through or a big customer being late in paying. Above all, it is important not to "play dead" when you find yourself in this situation. It is important to remember that you are also dealing with your creditors and some will not "forgive" you for any late payments. Stay in control to prevent this one-off event from becoming a bigger problem.
Priority n° 1: your tax and social security debts
This may seem obvious, but your overriding priority must be the State, i.e. your commitment to paying VAT, social security and tax. That is because you can quickly be caught up in a snowball effect if you miss payment deadlines, with your debts spiralling out of control. Be aware of hefty surcharges, fines and default interest. Indeed, if your company does not respect its tax and social obligations, you will soon find that public organisations have rather dissuasive recovery methods in place.
Beware of the penalties
For example, if you are late in paying your social security contributions, you will be subject to an increase of 10% of the amount due, with default interest of 7% per annum. Please also be aware that the NSSO can seize your company funds and that the tax authorities have the right to seize your bank accounts, to contact your customers to recover debt, or to hold you responsible as a manager under joint and several liability.
An accessible solution: payment facilities
In order to avoid this, there are many options available to you in terms of establishing a repayment schedule with these public institutions. Your company should ensure it takes advantage of these. Again, the more proactive you are, the easier it will be to negotiate a payment facility. The first step is to contact the organisation in question and propose a realistic repayment schedule. Even though the conditions vary, you will usually have to make a first payment before spreading the balance over a longer or shorter period. Even if you are fined for late payment, you may, under certain conditions, be entitled to a reduction or an exemption if you adhere to the conditions of contract.
Priority n° 2: your key creditors
After addressing your situation with the State, you must turn your attention to your strategic partners, i.e. those who have a decisive impact on the smooth running of your business on the basis that, if you tarnish the business relationship with your main suppliers, the situation could go from bad to worse. After a first screening to identify the most urgent bills and priority creditors, draw up a plan of action in line with your current and short-term cash-flow situation. Identify the debts you can pay immediately and in full. For the others, the right approach is to contact your partner.
Clear and controlled communication
Your goal should be threefold: first, demonstrate to your creditor that you are proactive in dealing with your cash-flow problem and that you care about your business partners. Then you must confirm that your situation is temporary and circumstantial. Finally, keep in mind what you want to achieve, make a reasonable proposal and be prepared to negotiate a satisfactory solution for both parties. For example, you can ask for a monthly payment plan in return for financial compensation (default payment interest, etc.), a formal commitment to long-term collaboration or an increase in order volume.
In any case, in order to stay afloat, you will understand you have to: act quickly, communicate clearly and negotiate a staggered payment plan.
A true agreement on the way for family businesses
From September 2018, your family can sit down round a table and reach a negotiated agreement about the distribution of your estate. The aim is to avoid conflict and uncertainty.
In Belgium, it seems self-evident that you should set out a family arrangement for the inheritance of a business as a written agreement. But this agreement will not have any legal standing. A new law hopes to change that.
The purpose of the so-called "family agreement" is to authorise a balanced agreement between the testator and their likely heirs in the case of an inheritance that has not yet been processed, and without applying legal restrictions.
What does this mean specifically?
The first major change relates to the statutory or reserved portion of the inheritance. This no longer depends on the number of heirs, but consists of half the estate. The testator's relatives are therefore no longer regarded as automatically entitled to inherit. If necessary, they may well be able to make a claim for maintenance payments. All children must in any case agree to the distribution of the assets when it does not follow the normal practice.
Another important point for the area of company succession is that targeted agreements can be set up. The value of the shares in the family company that are handed over to an heir as a gift cannot be put back on the table by the other heirs. Goods that were gifted during the testator's lifetime, or bequeathed in a will, are no longer added to the estate in kind, but in value. The heir involved must therefore continue to hold the items as assets in kind. The family agreement can therefore consist of arriving at a subjective balance between the heirs. This means that the inheritance is settled without threatening the continuation of the business activity.
One last change that may apply to the succession for a company is omitting a generation by gifting. Very often the direct heirs are not actually able to run the inherited family business. The only option they then have is to sell the company. If a grandchild, for example, inherits a family business in the form of a gift, the parents will now be able to decide to include the inherited business in their own portion of the inheritance.
Please note that the family agreement that will be available from 1 September 2018 will not help solve all the problems in the world. Despite the fact that recent changes in the law provide more flexibility, succession planning remains a suitable way of preparing yourself against unpleasant surprises due to an inheritance that goes awry. With a fair distribution, you avoid the risk of a joint inheritance, keep the peace within the family, and guarantee the stability of the business activity.