Reciprocal call and put options; Taxable capital gain on the resale of immovable property
In its judgment on November 13th, 2018, the Court of Appeal of Ghent (reference of the case: 2017/AR/1979) has recognized the legal reality of a “cross option agreement” in regard to the taxation of the capital gains after the resale of a building which was used for professional purposes.
A merchant ceased its operations as of May 1st, 2010. The business was handed over to the spouses X on December 29th, 2009.
Merchant operated in a building, meaning that it was used for professional purposes. The building was not sold immediately.
The merchant entered into a cross-option agreement on April 15th, 2010 with the spouses X with regards to the sale of the building.
The seller promised to sell within the period of 5 years and the buyer promised to complete the purchase within the period of one month thereafter.
It was explicitly stated in the cross-option agreement that there will only be a sale at the time of the signing of the official deed before the notary.
From the day of the signing of the cross-option agreement, spouses X paid an immobilisation allowance to the merchant. The amounts paid would be deducted from the sale price if one of the options is exercised.
As expected, the option was exercised and the deed of sale of the building was signed on April 23rd, 2015.
The building had considerably depreciated as its residual value was only 6.817,07 EUR. Therefore, the taxable capital gain amounted to 318.182,93 EUR on the sale price of 325.000,00 EUR. The tax administration intended to tax this amount (the capital gain) as soon as the option agreement was signed in 2010, without waiting for the signing of the deed in 2015.
The Belgian tax code foresees the taxation of income which is obtained on the occasion of the complete and definitive cessation of the business and which arises from capital gains on assets allocated to the professional activity.
The legal question
The key question is to determine when the income (the capital gain) had been actually obtained.
We saw that the tax administration was willing to tax the capital gain as soon as the option agreement was signed in 2010.
The Belgian Supreme Court had stated earlier that the capital gain on cessation is taxable at the time when the transferor's claim becomes certain and payable. If the payment of the transfer price is subject to a condition precedent, the capital gain obtained is taxable at the time the condition precedent is met (Belgian Supreme Court, 19 June 2008, case n° F.07.0003.N).
In this particular case, the Court of Appeal of Ghent has decided that the taxation can only take place once the title deeds have been signed at the notary, in accordance with the content of the cross-option agreement.
According to the Court, the reciprocal call and put options do not constitute a sale as it is always possible that neither party will exercise its option. At the time of the cross-option agreement, there was still no certainty or payable capital gain for the benefit of the merchant.
This is one real case example where there is recognition of the validity of reciprocal call and put options in a real estate matter with tax law implications.
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