New legislation on generational succession in property companies

The new legislation introduces the following main changes: (i) facilitating generational succession through tax succession for property companies actively engaged in the rental of real estate, (ii) reducing inheritance and gift tax from 15 % to 10 % for transfers of businesses to close family members, and (iii) establishing a legal right to value companies during generational succession using a schematic model for calculating inheritance and gift tax.

Generational succession with tax succession

In general, the transfer of ownership shares during a generational succession triggers a capital gains tax of up to 42 % on the appreciation that occurred while the transferor owned the asset. However, tax succession rules can reduce the tax burden on business transfers. A tax succession transfer is characterised by the absence of capital gains tax at the time of the transfer. Instead, the transferee inherits the tax position of the transferor and defers any capital gains taxation until the transferee transfers the family-owned business to a third party/to someone outside the family.

Tax succession does not apply to the transfer of shares in so-called “money tank companies”, i.e. companies that consist mainly of passive capital investments. Previously, it was not possible to apply tax succession to rental companies or property companies whose main activity was the rental of real estate, as this activity was classified as “passive capital investment” under the money tank rule.

Under the new legislation, active property companies engaged in the rental of real estate will no longer be classified as passive capital investors. However, certain conditions must be met for this reclassification to apply.

Firstly, the transferor must retain a controlling influence over the rental business. Secondly, the operation, including the negotiation of leases and other significant contracts, must not be delegated to an independent third party. Finally, the property or properties in question must have been owned by the company for more than one year and must have been actively let during that period.

Reduction of inheritance and gift tax

In addition to the possibility of transferring family-owned property companies without triggering tax, a reduction in inheritance and gift tax from 15 % to 10 % has been introduced for active property companies.

From 1 January 2027, the definition of close family members eligible for this reduced inheritance and gift tax will be extended to include siblings.

Implementation of a schematic model

Prior to the enactment of the new legislation, the market value of a company was used to assess inheritance and gift tax. In the absence of an objectively determinable market value, this value had to be estimated, which often led to unpredictability for unlisted companies. From 1 October 2024, family-owned businesses are entitled to have the value of their business determined using a schematic method, even if it differs from the market value.

Need assistance?

We expect this legislative development to have a considerable impact on all family-owned property companies, whether or not a generational succession is imminent. Gorrissen Federspiel’s specialists in our Real Estate and Tax groups remain available to provide guidance and support.