The Netherlands & real estate tax rules - keep a close eye on these developments

10.4% RETT will be due on share deals for newly built real estate. The measure is expected to enter into force as from 1 January 2024. This measure may have a significant impact on share deals for newly developed real estate that are already signed with completion in 2024.

Currently, newly built real estate can be acquired without VAT or real estate transfer tax (RETT), by acquiring all the shares in the relevant real estate company (REC), as the transfer of such shares is out of scope of VAT and exempt from RETT. This RETT exemption follows from the so-called Transparency-rulings, in which the Supreme Court ruled that the RETT concurrence exemption also applies to a share deal if the concurrence exemption would have applied to a direct transfer of real estate (asset deal). A direct transfer of newly built real estate is taxed with VAT and benefits from the RETT concurrence exemption. The share deal strategy is used often by developers of properties with VAT exempt lease, such as residential or healthcare.

The Dutch Ministry of Finance considers the difference in taxation between asset deals and share deals a disturbance of the level playing field and intends to resolve it by levying RETT on share deals. 

To this end, a proposal has been prepared to abolish the RETT exemption for share deals of RECs owning newly built real estate. The proposal was published for public consultation earlier this year (we refer to our Flash on this matter). The effect of the proposed measure is that RETT (10.4%) becomes due on such a share deal. The RETT is calculated on the fair market value of the real estate of the REC. The Spring Memorandum 2023 states that the measure is expected to take effect on 1 January 2024. Following the public consultation of the draft law proposal, an amended proposal with transitional law is being prepared, with a delayed entry date being a possible alternative to transitional law. 

The deductibility of interest under the Earnings Stripping Rule is proposed to be tightened by eliminating the EUR 1,000,000 threshold for companies owning real estate that is leased to third parties.  

Under the so-called Earnings Stripping Rule the deductibility of net interest expenses, i.e. the balance of interest costs and interest income including foreign exchange results on the loans, is limited for corporate income tax purposes to the highest of: (i) 20% of the fiscal EBITDA (formerly 30%), and (ii) a threshold of EUR 1,000,000. The ratio is applied at taxpayer level (in case of a fiscal unity at fiscal unity level). No distinction is made between intra-group and third-party interest and costs.

Upon introduction of the Earnings Stripping Rule, the Dutch Ministry of Finance explicitly acknowledged that related entities could apply the EUR 1,000,000 threshold multiple times. However, the Dutch legislator had already announced that, should the splitting up of entities occur often in practice, anti-fragmentation rules may be introduced.

In the Spring Memorandum 2023, the Dutch Ministry of Finance has announced an amendment of the Earnings Stripping Rule, with a view to the EUR 1,000,000 threshold being disapplied to companies owning real estate leased to third parties. This means that such taxpayers can only rely on the 20% EBITDA threshold. This is a (further) tightening of the interest deductibility rules for taxpayers engaged in the leasing of real estate.

This measure is intended to apply as of 1 January 2025. It is expected that the law proposal will be published on Budget Day in September 2023. 

According to a legislative proposal that was published for consultation, the Dutch Fiscal Investment Institution (FBI) regime for direct real estate investments will be abolished as per 1 January 2025. This could have significant tax consequences for existing FBI structures which should be reviewed.

Under the current rules, an FBI is subject to 0% corporate income tax, but the mandatory annual distribution is subject to 15% Dutch dividend withholding tax. As not in all situations Dutch taxation can effectively be levied, the Dutch government announced on Budget Day 2022 its intention to introduce a rule stating that the FBI-regime can no longer be applied by entities that invest directly in real estate. To this end, a proposal has been prepared to abolish the Dutch FBI-regime for direct real estate investments. The proposal was open to consultation until earlier this year (we refer to our Flash on this matter).

According to this proposal, an entity applying the FBI-regime is no longer allowed to invest directly in real estate. The restriction applies to real estate located in the Netherlands as well as abroad. The same applies to situations where an FBI invests in real estate through a partnership (either Dutch or foreign) that is transparent for Dutch tax purposes. The activities of an FBI should remain restricted to holding passive portfolio investments, which may be owned through taxable subsidiaries. Therefore, indirect investments in real estate through a regularly taxable company will still be allowed. In addition, an FBI is still allowed to hold the shares in a subsidiary that is engaged in project development activities. However, an FBI may no longer be involved in the management of subsidiaries that are engaged in project development activities, nor in management of the taxable subsidiaries that (indirectly) hold real estate assets. In addition, the current 60% financing limit for (indirect) real estate investments will be abolished. This effectively means that if the FBI regime is retained, the reduced general financing limit will apply, i.e., a maximum of 20% debt financing.

The Dutch government acknowledged that, in anticipation of the new rules, FBIs may need to restructure. In this regard, the proposed measures include a temporary RETT exemption applicable in the year 2024 for the acquisition of beneficial ownership of real estate resulting from the restructuring of an FBI into a tax-transparent vehicle such as a fund for joint account.

The initial entry date of 1 January 2024 has been postponed to 1 January 2025, which was confirmed in the Spring Memorandum 2023. It is (still) expected that the legislative proposal will be published on Budget Day 2023. The proposed amendments of the FBI-regime may have major consequences to existing investment structures and restructuring alternatives should be considered ultimately in 2024. 

The Dutch classification rules for partnerships and FGRs will be amended with the aim to align these rules with international standards. The impact of these rules should be reviewed for investment structures involving Dutch and/or foreign entities.

In spring 2021, the Dutch government proposed to overhaul the Dutch tax classification rules for Dutch and foreign entities, such as partnerships, with the aim to align these rules with international standards. To this end, a law proposal has been published for consultation in the beginning of 2023 relating to the tax classification rules for funds for joint account (FGRs). A separate proposal is being prepared for the general tax classification rules for Dutch and foreign entities such as limited partnerships.

Considering that many investors invest in Dutch and/or foreign real estate through FGRs and limited partnerships, it is essential to review the potential impact of these revised rules on investment structures involving such Dutch and/or foreign entities.

Recently it was announced that the entry date of both proposals has been postponed to 1 January 2025. Transitional arrangements will be introduced effective as of 1 January 2024, allowing FGRs and open limited partnerships, and the participants in such entities, to restructure tax-free during 2024. It is expected that the law proposals thereto will be published on Budget Day in September 2023 (we refer to our Flash on this matter). 

More strict conditions for the RETT demerger exemption are considered, making it more difficult to restructure real estate without the levy of RETT.

When acquiring real estate pursuant to a legal demerger, a RETT exemption applies if certain conditions are met. The demerger exemption is a facility aimed at ensuring that RETT is not an obstacle for the restructuring of businesses. Notwithstanding the requirement of business reasons for the application of the legal demerger exemption, in some cases a legal demerger (and application of the demerger exemption) may result in a transfer of a real estate to a third party without the levy of RETT. However, according to the Dutch Ministry of Finance, the legislator did not intend for the demerger exemption to be applied when the restructuring of a company takes place with the sole purpose of transferring real estate to third parties without levying RETT.

In addition to the demerger exemption, there are RETT exemptions for internal restructurings and legal mergers. These exemptions are subject to stricter conditions than the demerger exemption. For example, these exemptions have retention requirements on the shares of the acquirer for a period of three years and continuation requirements in respect of the transferor's business activities for three years after the transfer.

In the Spring Memorandum 2023, the Ministry of Finance proposes a measure to bring the conditions of the demerger exemption in line with the exemptions for internal restructurings and legal mergers. Specifically, this would mean that an intragroup demerger of real estate would be subject to the conditions of the internal restructuring exemption. In the case of a demerger outside a group, the demerger exemption would become subject to the conditions of the legal merger exemption. As a result of these stricter conditions, it will become more difficult to restructure real estate and companies without the levy of RETT.

In the Spring Memorandum 2023, this measure is presented as a policy option. It is still unclear whether the measure will be implemented and, if so, when it will come into force.

A VAT revision period for services such as renovations and construction is considered, similar to the VAT taxed transfer of real estate. This measure will significantly increase the administrative burden for real estate investors.

Leasing out real estate is as a main rule exempt from VAT. This means that the lessor cannot recover VAT on costs incurred, for example the VAT on renovation costs. However, in some cases, the leasing of real estate is subject to VAT, such as short-stay rentals. In those cases, the lessor can recover VAT on (renovation) costs.

For renovations not resulting in newly built real estate (in wezen nieuwbouw) for VAT purposes, the right to recover VAT is final after the financial year of first occupation. This is different for a renovation that does result in newly built property. In that case, the right to recover VAT is subject to a revision period of nine years following the financial year in which first occupation takes place (i.e., a capital goods scheme).

By first using a property that was renovated without creating newly built real estate for a short-term period (until the end of the financial year) for VAT-taxed lease such as short stay, VAT recovery can be realized, after which the property is used for VAT-exempt lease such as long-term rentals to private individuals. The Dutch VAT legislation does not provide any possibility to correct the fully recovered VAT in such a case. In this way, the landlord can ultimately lease out a VAT-exempt property for a long-term period and still recover all the VAT on the renovation costs.

The Dutch Ministry of Finance considers this practice not in line with the purpose of the legislation, as it feels that it artificially creates VAT recovery. Consequently, it has announced in the Spring Memorandum 2023 that the possibility of including a revision period for (capital intensive) renovation services is being explored. In this way, the VAT recovered on renovation costs will be monitored for a longer period and could possibly be revised when switching from VAT-taxed to VAT-exempt lease after the first year. Currently, there is no concrete intention for a law proposal and the measure is being further investigated. If this results in a draft law proposal, such a draft proposal will be published for public consultation. The proposal to introduce a VAT revision period on renovation services is not entirely new, as proposals to introduce such a measure were already made in 2005 and 2017. However, these proposals never became final.

The introduction of the Box 3 system, whereby income from assets will be taxed based on the actual return achieved, is postponed to 2027.

The Dutch Ministry of Finance plans to introduce a new Box 3 system whereby income from assets will be taxed with Dutch personal income tax based on the actual return achieved. The initial entry date of this new income tax system of 1 January 2026 has been postponed to 1 January 2027, resulting in an expected loss of tax revenue of EUR 395 million in 2026.

A legislative proposal of the new income tax system is expected to be published for public consultation in the third quarter of 2023. As part of the new system, it is currently reviewed whether taxation of (income derived from) privately held real estate can be moved from Box 3 to Box 1 of the Dutch Personal Income Tax Act. The taxable Box 1 income is currently taxed at a progressive rate up to 49.50%. 

Until the actual implementation of a new income tax system, taxation in Box 3 will be based on deemed returns and a flat tax rate in accordance with the Box 3 Bridging Act, which entered into force on 1 January 2023. The flat tax rate will gradually increase from 32% in 2023 to 34% in 2025. Generally speaking, both the Box 3 Bridging Act as well as the new income tax system will result (expectedly) in an increase of the taxation of (income derived from) real estate held privately.

The Dutch business succession facilities will change. One of the announced changes is the exclusion by default of leased real estate to third parties, as a result of which the transfer of such real estate as part of a business succession may be taxed with gift and inheritance tax or personal income tax.

The Dutch business succession scheme aims to ensure the continuity of a business by providing specific tax exemptions and a rollover relief for business successions. The Dutch Ministry of Finance has announced various changes to the Dutch business succession exemptions in the gift and inheritance tax and the tax neutral transfer facility (rollover relief) for personal income tax purposes. These changes are expected to enter into force on 1 January 2025. One of the announced changes is the exclusion by default of leased real estate to third parties. Real estate used within the own business will in principle remain available to qualify for the Dutch business succession facilities. However, it is currently unclear what the scope of ‘own business’ will be, and for example, what interest a lessor must hold in a company in order to qualify as real estate used within the own business. This measure is expected to enter into force on 1 January 2024.