Real Estate Structuring and Sustainability: the revamped investment deduction

The Belgian parliament has adopted the reform of the investment deduction, one of Belgium's main tax incentives when it goes about sustainability of buildings. How important is this reform for investors acquiring, renovating or otherwise converting professional real estate?

The current regime up and until 31 December 2024

For details on the current regime, please refer to a previous article The Belgian investment deduction: what will change? but in a nutshell, it boils down to the following: businesses (self-employed and companies) can, subject to conditions, receive a tax deduction for investments in tangible and intangible fixed assets. The amount of that deduction depends on (a) the type of business and (b) the nature of the investment.

The general investment deduction of 8% is only available for small businesses and the self-employed. However, there are also a series of special deductions, usually at a higher rate, and these are open to all taxpayers, including larger companies. Under the current regime, real estate investors can rely on a special deduction of 20.5% for certain energy savings investments listed in a Royal Decree. These include, e.g.,

• for buildings constructed before 1980: certain insulation work or work to limit ventilation losses
• waste heat recovery
• recovery of waste heat from production or air-conditioning equipment in use
• use of wind energy (e.g., installation of wind turbines)
• capture of direct or diffuse solar radiation (e.g., installation of photovoltaic panels)

The new regime for investment realised as from 1 January 2025

The new regime rationalises the investment allowance and divides it into 3 categories:

• the basic deduction, which is open to self-employed and SMEs (we refer to our earlier article);
• the technology deduction, which concerns investments in patents and environmentally friendly investments for R&D; and
• the increased thematic deduction.

For real estate investors, this last category is the most relevant and covers the following types of investments:

• investments in energy efficiency and renewable energy;
• investments in carbon emission-free transport;
• environmentally friendly investments;
• supporting digital investments (i.e., investments related to the three aforementioned investment categories).

The investment deduction shall amount to 30% of the investment value and is available to all companies under the conditions mentioned below.

Deep-dive into the conditions

a. Eligible investments

Eligible investment will be determined by a Royal Decree that will be subject to regular update. And here lies perhaps the biggest change.

The new regime provides that the list of eligible investments will be valid for 3 years, with a possibility of one 2-year extension. After that period of time, a new or updated list of eligible investments will be enacted. The aim is to encourage the Belgian government to evaluate the list of eligible investments frequently and to renew them, given the rapid development of technologies. The minister further stated that when compiling the list of eligible investments, the budgetary impact will be taken into account. So, while the percentage is higher than today, fewer investments may qualify. Finally, the minister also took the view that the eligible investments should not include that are sufficiently profitable even without investment deduction.

Although the principles are fixed, the Royal Decree to list the eligible investments has not yet be promulgated.

b. Federal subsidies for regional obligations?

In the Flemish region, from 2025, building permits will only allow building heating via a heat pump, a heat network, a biomass boiler or direct electric heating. The buildings must also provide a minimum share of renewable energy via their own production. This minimum share of renewable energy is 15 kWh/m² of solar energy for a new building and 20 kWh/m² for a non-residential unit through 1 or more of the following techniques: solar panels, solar water heater or participation.

Recently, the Brussels Region also introduced a renovation obligation requiring both residential and non-residential buildings to achieve a minimum EPB in a few years' time.

In determining the list of eligible investments, will the Federal government take into account these regional statutory obligations, and open the revamped investment deductions to companies that have to comply with those obligations? It is conceivable that the government could provide subsidies to allow companies to comply with their legal obligations, but it is not obvious.

c. Certificate from the competent authority: a welcome clarification

To benefit from the 30% thematic deduction, taxpayers are once again required to enclose a confirmation certificate from the competent authority to their annual tax return. The new regime provides certain clarifications in this respect.

The certificate must be obtained from the federal public services for:

• investments in energy efficiency and renewable energy, as well as environmentally friendly investments that fall within the competencies of the Federal State;
• investments in carbon emission-free transport;
• supporting digital investments;
• investments made in Belgium's exclusive economic zone in the North Sea (e.g., wind farms in the zone).

In this respect, the clarification is more than welcome given the legal uncertainty surrounding these investments.

The certificate must be obtained from the competent regional services for: investments in energy efficiency and renewable energy, as well as environmentally friendly investments that fall within the competencies of the Region.

The competent authority will refuse to issue the certificate (i) if the investment is not an eligible investment as listed in the Royal Decree (ii) if the investment causes unreasonable harm to the environment. This second ground for exclusion is a novelty and must be assessed on the basis of the Do No Significant Harm (DNSH) test as set out in Article 17 of the Taxonomy Regulation (EU 2020/852).

It should be noted that the certificate is based on the list of eligible investments in force at the time the application for certificate is submitted. The certificate will not lose its value if the list is modified in the meantime.

d. Limitations

It should be noted that the Royal Decree may limit the deduction for one or more eligible investments, in such a way that the 30% increased thematic deduction may be capped to a maximum amount. This maximum amount may, for instance, be linked to certain criteria such as kWh or CO² saved.

The parliamentary works give the following example: an exceptional and innovative fixed asset acquired by a large energy production company has an acquisition value of 100 million EUR, which corresponds to an investment deduction of 30 million EUR. The Royal Decree could cap the deduction for a technology of that type to 10 million EUR.

e. Carry-forward

The increased thematic investment deduction allows to exempt (part of) the taxable profits of the year. In case of insufficient profit, the unused portion can be carried forward indefinitely, to be applied towards taxable profits during subsequent taxable years.

f. Exclusions

The thematic increased deduction for investment is excluded in the following cases:

• for investments not listed as eligible investments by Royal Decree;
• for companies qualifying as “undertakings in difficulty” (entreprises en difficulté / ondernemingen in moeilijkheden) (see below);
• taxpayer transferring the right to use to third parties (see below);
• for companies in respect of which there is an outstanding recovery order pursuant to a decision of the European Commission concerning State Aid;
• for companies that have requested regional aid with respect to the fixed assets that would bring the total government support above the EU-accepted threshold.

g. Specific exclusion: undertakings in difficulty

The investment deduction cannot be applied by undertakings in difficulty (entreprises en difficulté / ondernemingen in moeilijkheden), without the parliamentary works further defining or commenting on this concept. Under the current regime, this exclusion was introduced in 2021 and was specifically applicable only to investment deduction related to carbon-free trucks and recharging infrastructure for blue, green or turquoise hydrogen and electric recharging infrastructure. In its circular 2021/C/115 on the tax greening of mobility, the tax authorities did not comment on this specific exclusion either.

What does it mean?

From our experience, (regional) tax authorities have occasionally referred to the concept of undertakings in difficulty as set out by the Commission Regulation (EU) n° 651/2014 state aid. According to this regulation, an ‘undertaking in difficulty’ means an undertaking in respect of which at least one of the following circumstances occurs:

• In the case of a limited liability company, where more than half of its subscribed share capital has disappeared as a result of accumulated losses (not applicable to certain SMEs).
• In the case of a company where at least some of its members have unlimited liability for the debt of the company, where more than half of its capital as shown in the company accounts has disappeared as a result of accumulated losses (not applicable to certain SMEs).
• Where the undertaking is subject to collective insolvency proceedings or fulfils the criteria under its domestic law for being placed in collective insolvency proceedings at the request of its creditors.
• Where the undertaking has received rescue aid and has not yet reimbursed the loan or terminated the guarantee, or has received restructuring aid and is still subject to a restructuring plan.
• In the case of an undertaking that is not an SME, where, for the past two years, the undertaking’s book debt to equity ratio has been greater than 7.5 and the undertaking’s EBITDA interest coverage ratio has been below 1.0.

This exclusion deserves quickly an explanation from the tax administration as it might be extremely detrimental to the real estate sector, at least the two first situations mentioned above. Indeed, the equity of a company owning real estate as shown in its Belgian GAAP accounts may totally not reflect the financial situation of this company since Belgian GAAP are based on historical value (as opposed to fair market value on the real estate assets) and the depreciations taken (over time) on the asset, which do not correspond to an effective cost, may have mathematically decrease the company’s equity without however any impact on the company’s solvability.

h. Specific exclusion: use it yourself

The taxpayer must use the investment for his own activity, and the benefit of the investment deduction will be lost in case the use of the eligible investment is transferred to a third party.

The investment deduction shall not apply in the two following situations:

• To investments acquired or created with the purpose of transferring the right to use them to a third party, if the asset can be depreciated by the company that acquired the right. The exclusion only applies to financial leasing, long term lease or building right, or any similar immovable right (with the notable exclusion of usufruct). The law requires that the investment deduction be reserved for the economic owner of the asset who can depreciate it.
  
  This limitation only applies when the eligible investments is the object of such financial leasing or right in rem.
  
  Let’s take an example with solar panels, assuming it will be an eligible investment: If the owner of a building has installed solar panels on the roof and has given then in financial lease to a third-party, the owner will not benefit from the investment deduction. If this owner has granted a right to build on its roof to a third-party that has installed (and is using) the solar panels, then this third-party shall benefit from the investment deduction.

• To investments for which the right of use has been transferred to another taxpayer in a manner different from the ones referred above. Recent case law shows that the lease is specifically targeted by this second exclusion, however subject to an important exception: this exclusion does not apply if this transfer has been made to a company which itself satisfies the conditions, criteria and limits for the application of the investment deduction to an identical or higher percentage, which uses these fixed assets in Belgium to generate profits and which does not transfer their use to a third party in whole or in part.
  
  As long as the tenants do not transfer this use to third parties, the benefit of the investment deduction in the hands of the landlord/owner should remain.

Side effect of Pillar 2 for in-scope real estate investors?

This investment deduction might have negative effect for real estate investors in-scope of Pillar 2 (for more details, refer to our article Pillar Two and the real estate sector ). Indeed, this deduction from taxable profits should decrease their amount of Covered Taxes and hence their Effective Tax Rate, potentially leading to a top-up tax under Pillar. This should not have been the case with a qualifying tax credit, and this qualifying tax credit is well available in replacement of the technology deduction. In this respect, it seems that a difference in treatment is introduced between taxpayers depending on their sector of activity and investments; it remains to be seen whether this difference can be justified.

What’s next?

On the sustainability side, the European Parliament and the Council have adopted a new directive with respect to energy performances on buildings. The Directive has been published on 8 May 2024 and will enter into force on 28 May 2024, subject to a phased implementation by the EU Member States. This new Directive sets guiding principles for the EU Member States to measure and upgrade the energy performances of the buildings and, for the real estate investors, such upgrades are expected to translate into new investments for which the investment deduction might be advantageous.​​