Construction usufruct/bare ownership : the tax authorities must prove the taxable advantages

If there is a legal construction that is often used within the framework of SME’s, than it is the operation consisting for the associate-manager in transfering the usufruct – for a determined period – of a building of which he is the owner to the company he owns.

This construction allows the company as well as its manager to achieve tax savings by simple mechanisms of civil law.

Indeed, the company that has received the usufruct reduces its taxable base thanks to the depreciation of the acquired rights and to the bearing of the maintenance costs of the building, the financial charges linked to the investment as well as the costs for possible construction or transformation works to the encumbered asset.

With regard to the manager, he regains full property of the building including its improvements and transformations at the end of the contract, where appropriate without compensation and in any case, without tax, seen the fact that the regrouping of the full property at the end of the contract does not give rise to taxation (here, there is indeed no transfert of right giving rise to tax generation).

Taking into account its undeniable tax « profitability », the administration critises in a near systematic way the usufruct/bare ownership constructions that are made by the taxpayers.

The administration generally considers that the usufruct rules have not been respected and proceeds to a reject of certain charges on the part of the company or to the taxation of a benefit in kind on the part of the manager.

This is generally the case when the company fully finances the works that are basically at the expense of the bare owner.

The court of first instance of Namur has recently rendered an interesting judgement on the matter of the burden of proof for the administration to tax a benefit in kind on the part of the manager.

In this case, the company had provided the list of works that had been executed by the company to the administration.

While reading this, it became clear that the company had financed a series of works that could be considered as « major repairs » that are normally borne by the bare owner.
Others, however, could be qualified as landscaping projects that are contractually left to the beneficial owner.

However, at the establishment of its taxation, the administration simply declared that the total amount of the works was a direct reflection of the works that are basically at the expense of the bare owner to the extend that they exceeded an investment up to the amount of the revenues produced by the usufruct. So the administration did not make any distinction according to the nature of the executed works.

The court will sanction that behaviour : according to the court, the administration had to analyse each work post in order to deliver the proof it needed to produce, and appreciate if it concerned major repairs or landscaping projects ; Only the first ones can justify the calculation of a benefit in kind on the part of the beneficial owners.

With the arbitrary nature of the taxation not seeming to have been raised, the court had concluded that the amount of a series of works was not taxable and had reduced the enrolled contributions accordingly.

The court had also granted the applicant that a depreciation of the works amounting to 10% a year should taken into account.

This decision is in accordance with the rules regarding the burden of proof : if the tax authorities want to tax, they need to establish the facts that create the right they invoke.

Notwithstanding the criticism it generally receives from the administration, the usufruct/bare ownership construction remains an interesting operation from a tax point of view. However, as always in fiscal matters, at the conditionthat the rules of the game are respected.