New rules aimed at combating the use of real estate entities to avoid transfer tax
If shares in a company are bought or sold, or if, for example, the profit-sharing rights attached to an existing shareholding are increased, it is important to determine whether transfer tax is due.
Transfer tax is due upon the acquisition of real estate located in the Netherlands. In order to combat tax avoidance schemes whereby real estate is acquired not directly but via the holding of shares in a company that owns real estate, the shares in such a company are – subject to certain conditions – also deemed to be real estate. Under new rules that came into effect on 1 January 2011, those conditions have been amended in such a way as to increase the likelihood that an acquisition of shares in an entity that owns real estate will be subject to transfer tax.
The acquisition of shares in an entity that owns real estate is only subject to transfer tax if that entity is characterised as a "real estate entity" (onroerende zaaklichaam). Since 1 January 2011 the relevant threshold that must be met in order to be characterised as a real estate entity has been lowered, and real estate located abroad has been included in this regard.
Under the old rules, an entity was characterised as a real estate entity if 70% or more of its assets consisted of Dutch real estate (or consisted of such in the preceding year). With effect from 1 January 2011, an entity will be characterised as a real estate entity if (i) more than 50% of its assets consist of real estate, in the Netherlands or abroad (or consisted of such in the preceding year) and, in addition, (ii) more than 30% of its assets consist of real estate in the Netherlands (or consisted of such in the preceding year).
Furthermore, for the purpose of these tests, under the new rules the assets of affiliated entities are more likely to be counted as part of a company's own assets, and certain assets are more likely to be excluded because they are deemed, in the absence of evidence to the contrary, to have been created solely for tax purposes.
Besides the changes making it more likely that a company will be characterised as a real estate entity, other changes have made it more likely that a taxable event will be deemed to have occurred. For example, an acquisition of shares now also includes an increase in the profit-sharing rights attached to shares already held in the relevant entity.
The new rules are complex and will be difficult to implement in practice. A detailed investigation will have to be carried out in order to determine whether the acquisition of shares in a company is subject to transfer tax. This investigation will have to cover the assets owned by the seller and its affiliates not only at the time of the acquisition, but also during the preceding year. Any previous acquisitions of shares by the buyer and its affiliates will also have to be considered. In practice, it will not always be possible or easy to obtain this information, in particular where complicated group structures are involved. In brief: the rules appear to be a form of "overkill", because they will affect so many more market parties than those actually involved in setting up schemes to avoid paying transfer tax.
Extension of exemption period for resale of residential real estate
If real estate is resold within a six-month period, the second sale is not subject to transfer tax if such tax was due on the first sale. However, if the real estate increased in value during that period, transfer tax is due on the increase. To temporarily support the residential real estate market, the six-month period has been extended to twelve months for residential real estate. Therefore, if residential real estate is bought in 2011 in a transaction that is subject to transfer tax, and the real estate is subsequently resold within a period of twelve months, transfer tax is due only on any increase in the real estate's value, and not on the entire resale price.