On 1 January 2012, a new real estate transfer tax exemption was introduced with respect to the acquisition of real estate in the context of a legal merger outside a group of companies. Before 2012, Dutch law only explicitly provided real estate transfer tax exemptions in cases involving a business merger, demerger, or internal reorganisation, but not specifically for legal mergers. Until then, real estate transfer tax exemptions relating to legal mergers outside a group of companies required ministerial approval and were only permitted if the conditions for the business merger exemption were met. In cases involving an intragroup legal merger, the internal reorganisation exemption could be claimed.
The general rule for the exemption can be found in paragraph 1 of Article 5bis of the Taxation of Legal Transactions (Implementation) Decree. The exemption applies when assets are transferred under universal title pursuant to a legal merger between legal entities that do not belong to the same group of companies. If the merging companies do belong to the same group of companies, this exemption may not be claimed. In that case, the internal reorganisation exemption provided for in Article 5b of the Taxation of Legal Transactions (Implementation) Decree should be claimed.
Certain conditions must be met in order to claim the legal merger facility. The first condition is that there must be legitimate business reasons for implementing the legal merger. In his explanatory notes, the Deputy Minister of Finance indicated that the merger must result in substantial benefits of scale and synergy effects. This “legitimate business reasons test” will not be met if the rather simple legal transfer formalities were the only reason for the legal merger. Secondly, shares in the acquiring entity may not be transferred within three years of the legal merger if a “real estate entity” is involved in the merger. This “retention requirement” does not apply if no real estate entity is involved in the merger. Finally, the legal merger facility imposes a continuity requirement, which means that the acquiring entity must continue the merging entities’ activities in their entirety for at least three years after the merger. Because of the wording “in their entirety”, divesting or terminating even a small portion of these activities will make it difficult to meet the continuity requirement.
The new legal merger facility for mergers outside a group of companies applies to all Dutch legal entities, including the formal association, foundation, cooperation and the mutual insurance association. The exemption also applies to the acquisition of shares that are issued as part of the merger by a real estate entity, if the acquisition can be considered to be a taxable acquisition.