Gift tax and the ‘cheese route’

Belgians have suddenly discovered that there is a “cheese route” and that it has been closed today

A “cheese route”?

The “kaasroute” as even French speakers call it is a cheesy joke. It is supposed to be the road to the Netherlands where Belgians can make gifts of cash, shares or bonds before a notary free of gift tax and, therefore, inheritance tax. Since 15 December, gifts of movables before a notary in the Netherlands – or in any other country – need to be registered and gift tax will be due at 3% for gifts to partners and children and 7% to all others (respectively 3.3% and 7% in Wallonia).

 is tax planning by making a gift before a notary in the Netherlands or in Switzerland.

You may Belgium wants to close the “cheese route”. Not literally of course, this is just a cheesy quip by a politician or a tax lawyer.  What they mean

Why would you want to go to the Netherlands to make a gift? That seems a long distance for a gift… Do you need a notary to make a gift?

When is gift tax due?

Gift tax is a registration tax, a tax that is due when documents are registered with the registration office at the Ministry of Finance. The registration tax for documents that show a gift is called gift tax.

Certain documents must be registered by law. That is the case for rental agreements as well as for all deeds that are signed before a notary. For any other deeds and documents, registration is optional. Registration may be useful to determine the exact date it was registered as the date of registration cannot be disproven.

So, any deed signed before a Belgian notary must be registered.  

And any document that shows a gift must be signed before a notary in what is called an ‘authentic instrument’ (art. 931 civil code). The penalty for a gift that is not made before a notary is that the gift is absolutely null and void (art. 1339 civil code).

When you combine these two rules, gift tax would be due whenever you make a gift.

Nevertheless, it is generally accepted that hand-to-hand gifts, indirect and disguised gifts are perfectly valid without passing before a notary.

A hand-to-hand gift of cash or of artwork is valid. You just hand over the Picasso and your son can hang it on his wall and call it his own. And of course, no gift tax is due on birthday or Christmas presents.

And a gift of cash or stocks and bonds from one bank account or brokerage account to another is also a valid gift on which no gift tax is due, as long as you do not call it a gift in the communication.

The inconvenience is that this transfer is just a transfer of ownership without any conditions (like “if you die before me, the gift is cancelled, and I get the Picasso back”). If you make a gift and you want to attach conditions, you need to do this in a separate agreement signed by both parties, and that separate agreement does not need to be registered. This is often called “un pacte adjoint”.

The inconvenience is the three-year rule, it provides that any gift that has been made during the three years before death is added to the deceased’s estate for calculating the inheritance tax. A hand to had gift or an indirect gift made during less than three years before will therefore be liable to inheritance tax, unless the gift is in a document that has been registered. This is why people who fear that they will die within three years present gifts that do not need a notarised deed for registration.

Notarised deeds

For the gift of shares of a company, we need to distinguish according to the form of the shares. In the old days, shares of a company came in three forms: bearer shares, registered shares and dematerialised shares.

• Bearer shares are just a piece of paper that proves ownership, that physical share certificate can be transferred anonymously by a handover, and that should never be lost.  Bearer shares can be given with a hand-to-hand gift. They are not allowed in Belgium anymore.

• Registered shares are registered in the company’s share register and are transferred by transferring them from the page of one shareholder to that of another.

• Dematerialised shares are held on an account with a bank or broker, a securities or brokerage account, and can be transferred with an electronic transaction. Dematerialised shares and money on an account can be transferred with an indirect gift of a bank transfer ; they do not have to be made by notarial deed.  Your daughter now has a brokerage account with her own stocks and bonds.

Registered shares cannot be given by a hand-to-hand gift or by a bank transfer. The only evidence of the transfer is the entry in the register of registered shareholders. However, that does not constitute proof of the transfer; it only makes the transfer binding vis-à-vis the company. Such a gift will have to be recorded in a notarised deed.

Giving and reserving usufruct is also only possible in a notarised deed as usufruit is a right in rem.  On the other hand, making a gift against an undertaking of the beneficiary to pay you an annuity can be done in the pacte adjoint.

Insurance policies can only be gifted via a notarised deed.

If a notarial deed is drawn up in Belgium, it must be registered and if that deed shows a gift, gift tax will be due, currently at 3% between parents and children (3.3% in Wallonia)

Notarised deed before a notary in the Netherlands

A notarised deed executed in the Netherlands, for example, is an equally valid notarised deed, but it did not have to be registered in Belgium.

Until today.

That meant that Belgians made their gifts before a notary in Roosdaal, and no gift tax was due, in Belgium or in the Netherlands, because gift tax is only due there for gifts between Dutch residents.  The only hiccup was that inheritance tax was due if the donor did not live for another three years.

The act of 3 December 2020 now extends the obligation to register gifts to notarised deeds executed abroad. That takes out all the fun of going to sign a gift deed in the Netherlands.