On 10 October 2017, the four coalition parties that have agreed to form a government (i.e. VVD, CDA, D66 and ChristenUnie), presented their coalition agreement by the name of ‘Vertrouwen in de toekomst’ (Confidence in the Future) after seven months of negotiating. The coalition agreement offers beneficial tax measures for businesses, such as the abolition of dividend withholding tax and a lowering of the corporate income tax rates. These measures should be funded by broadening the tax base, e.g. by limiting interest deduction, restricting depreciation on owner-occupied properties, abolishing the tax regime for fiscal investment institutions investing in real estate and limiting the utilisation period for tax losses. In this article, we will briefly address the proposed tax measures that are set to affect the real estate practice.
Lowering corporate income tax rates
The corporate income tax rates will be lowered by 1 percentage point in 2019, by 1.5 percentage points in 2020 and by another 1.5 percentage points in 2021. This will bring the rates for the two brackets to 16% and 21% respectively by 2021. The stretching of the first tax bracket that was previously proposed to take effect in 2018 has now been cancelled as a result.
Abolition of dividend withholding tax
The most discussed measure from the coalition agreement is undoubtedly the abolition of dividend withholding tax. This will ease the administrative burden for many companies. The plan is to abolish dividend withholding tax with effect from 2020. Dividend withholding tax will continue to be levied on payments to low-tax jurisdictions and in situations of abuse. The exact details of this anti-abuse measure are not clear yet. The coalition has also announced that it will start to levy taxes on interest and royalties paid to low-tax jurisdictions and in situations of abuse.
Restricting the tax regime for fiscal investment institutions
The fiscal investment institution (Dutch acronym: FBI) saw the light in 1970 and was designed to create tax neutrality. Income from direct investments in real estate by private investors is taxable only at the investor. If the investor were to invest in a private or public limited liability company or another legal entity that subsequently makes the same investment, any income from this investment is taxable at both the investor and the legal entity, resulting in double taxation. For this reason, a fiscal investment institution is liable to corporate income tax at a rate of 0%. Payments to shareholders are in principle subject to 15% dividend withholding tax.
Due to the abolition of dividend withholding tax, investments in Dutch-based real estate by foreign investors would no longer be liable to Dutch tax at all in the future. That is why the coalition has proposed to disallow direct investments in real estate by fiscal investment institutions with effect from 2020. Potential solutions are currently being considered.
Restricting interest rate deduction based on EBITDA for tax purposes
The European Anti Tax Avoidance Directive (ATAD) will impose restrictions on the deductibility of interest on both intercompany and third-party loans. Starting from 1 January 2019, interest will no longer qualify for tax deduction to the extent that the balance of interest paid and interest received exceeds 30% of EBITDA for tax purposes. It has been proposed to allow each taxpayer to deduct at least € 1,000,000 interest expense every year. The proposal does not provide in a grandfathering for loans contracted before the date ATAD was announced (i.e. June 2016). The proposal does not include an exemption for the infrastructure sector, nor does it offer the option of a group escape. Complementary to the introduction of this measure, it has been announced that a number of existing interest deduction restrictions will be abolished. This will probably concern Sections 13L and 15ad of the Dutch Corporate Income Tax Act 1969, which are designed to restrict interest deduction for excessively financed subsidiaries and acquisitions.
Restricting depreciation of owner-occupied property
Starting from 2018, real estate being used in the own enterprise will become subject to the same depreciation restrictions as let out real estate. Depreciation charges may run up to 100% of the WOZ value (was 50% of the WOZ value).
Restricting utilisation of tax losses
The options for utilising tax losses will be further limited. At the moment, tax losses can be offset against any profits for the previous year (carry-back) and any profits for the next nine years (carry-forward). The facility for carrying forward tax losses will be limited to six years. The effective date of this measure has not yet been announced, nor is there any clarity at this point as to whether a transitional scheme will apply.
Measures for the property market
The new cabinet is looking to scale back the facilities for mortgage interest deduction at an accelerated pace from 2020 onwards. In 2018 and 2019, the maximum rate of mortgage interest deduction will still be 49.5% and 49% respectively. The coalition agreement proposes to reduce the maximum deduction by 3 percentage points per year in the period between 2020 and 2023. The rates at which mortgage interest can be deducted will then be 46% in 2020, 43% in 2021, 40% in 2022 and 37% in 2023. Some of the money that will be released as a result of this measure will be used to reduce the imputed income from home ownership by 0.15%, i.e. from 0.75% to 0.6%, by 2020. The tax deduction facility for owner-occupiers who have no or a small mortgage debt will be scaled back over 30 years. The Dutch Parliament has already passed this bill.
Implications for the real estate market
The announced measures will cause considerable changes to the tax landscape. They can possibly have a major effect on the real estate market. That being said, the exact impact can only be determined by looking at each taxpayer’s specific situation.