An extract from The Real Estate Investment Structure Taxation Review, 2nd Edition
Asset deals versus share dealsi Legal framework
Generally, real estate is acquired either as a direct purchase of the real estate or the purchase of the shares in a company owning the real estate.Asset deals
The acquisition of real estate requires the purchase and transfer of the right related to the property. The property can be acquired directly through an asset deal. Not many statutory requirements apply to the purchase agreement (e.g., the purchase agreement does not necessarily have to be in the form of a notarial deed). It is advisable to perform a cadastral search of the property, prior to entering into the purchase agreement. In the cadastral search, the civil law notary will review whether there are any mortgages and liens on the real estate and whether the plot is encumbered with an easement. In addition, the civil law notary will review whether the seller of the property owns the legal title related to the property.
The actual legal transfer of the property is executed by signing a notarial deed on the transaction date. After signing, the civil law notary will register the deed with the land registry. Generally, the funds will be transferred through a secured third-party account of the civil law notary. Upon execution of the transfer, the notary will transfer the funds and terminate existing mortgages if not transferred to the purchaser. Furthermore, the civil law notary will remit any real estate transfer tax payable to the Dutch tax authorities.Share deals
In addition to an asset deal, real estate may also be acquired through the purchase of shares or interest in the legal entity that owns the real estate. The transaction will be effected by way of a share purchase agreement. Similar to asset deals, it is advisable to perform proper due diligence prior to entering into the transaction. If specific issues come up during the due diligence, the seller may provide an indemnity to the buyer.
In addition to transferring the funds through a secured third-party account of the civil law notary, parties could also use an escrow agent. In the case of the transfer of shares of a real estate company, the buyer of the shares will remit any real estate transfer tax payable.
In the case of the transfer of shares in a BV, Dutch civil law requires the share purchase agreement to be notarised. The transfer of interests in a limited partnership does not require notarisation.
Mergers or acquisitions that meet a certain financial threshold require competition clearance from the competent authority. Any transaction that would require clearance cannot enter into effect prior to the approval of the competent authority. Generally, this will be included as a condition precedent in a share purchase agreement.
The Netherlands does not have restrictions on foreign ownership of Dutch real estate or shares in companies with Dutch real estate.ii Corporate forms and corporate tax framework
The most common corporate forms to acquire real estate in the Netherlands are Dutch private companies, such as NVs and BVs. In addition, an FGR may also be used to invest in and own real estate. CVs are also often used as tax-transparent vehicles.Mutual funds
The FGR is not a legal entity and is created by way of an agreement between the manager, investors and the legal owner. The latter is generally a Dutch foundation solely set up to hold the legal title of the assets of the FGR. An FGR can be structured as a transparent body. A transparent FGR will not be subject to Dutch corporate income tax and dividend withholding tax. However, a non-transparent FGR can benefit from the status of an FBI. Non-transparent FGRs are taxed similarly to private companies.Private companies
Dutch resident companies are subject to corporate income tax on their worldwide profits and gains at a rate of 25 per cent, unless an exemption such as the participation exemption applies.3 Deductions are available for interest expenses (subject to certain interest limitation rules) and tax depreciation. Capital gains and dividends received from qualifying subsidiaries may be exempt from corporate income tax at the level of the shareholder owing to the applicability of the participation exemption.Fiscal unity
The Netherlands has a fiscal unity concept for corporate income tax purposes.4 The Dutch fiscal unity regime allows a Dutch resident parent and its Dutch resident subsidiaries to file one consolidated tax return. If companies are included in a fiscal unity, intercompany transactions (such as the transfer of real estate assets) are in principle ignored for tax purposes. However, the termination of a fiscal unity within six years of an intercompany transaction may trigger taxation.Interest limitation rules
In general, interest payments on loans and other debts of the company are deductible as regular business expenses. However, Dutch case law and particular provisions of the corporate income tax act may prevent the interest deduction.
As of 1 January 2019, the Netherlands implemented the Anti-Tax Avoidance Directive in its domestic law. As a result, the Netherlands introduced an earnings stripping rule, which may have a significant impact. The earnings stripping rule is a measure that limits the deductibility of excess interest expenses. Further to the earnings stripping rule, net borrowing costs (i.e., the surplus of interest expenses over interest revenues) are not deductible to the extent that it exceeds whichever is the higher of 30 per cent of the taxpayer's earnings before interest, tax, depreciation and amortisation (EBITDA) and €1 million.iii Direct investment in real estate
If real estate is transferred through an asset deal, VAT and real estate transfer tax may apply.Real estate transfer tax
In the Netherlands, real estate transfer tax at a rate of 6 per cent (2 per cent residential) is levied in relation to the acquisition of the legal title or beneficial ownership of real estate located in the Netherlands or certain rights relating to the property, such as rights of usufruct. For real estate transfer tax purposes, the acquisition of real estate has a broad scope and includes not only the acquisition of a legal title, but also the acquisition of beneficial title, a real estate property right or legal or beneficial title to the shares in a company holding the real estate.
Real estate transfer tax is payable by the purchaser of the real estate. The civil law notary executing the deed of transfer will generally remit the real estate transfer tax payable to the Dutch tax authorities.
Generally, the tax base is the higher of the fair market value of the real estate assets or the consideration paid for the acquisition. If real estate is transferred within six months of an earlier transfer of the same real estate asset, the tax base is reduced by the amount of the tax base applied to this earlier transfer, resulting in a tax base of merely the value accrued in the period between the two transfers.
The acquisition of real estate may be exempt from real estate transfer tax if certain conditions are met. For instance, a transfer is exempt from real estate transfer tax if the transfer is subject to VAT unless the real estate assets have been used as a business asset and the purchaser can deduct the input VAT due, either fully or in part. In addition, an exemption could be available if a business succession facility is applicable. Moreover, the acquisition may be exempt from real estate transfer tax if it qualifies as an internal reorganisation, namely if the real estate asset is transferred by an entity that is part of a qualifying group to another entity in which no other entity holds an interest of 90 per cent or more, together with all other entities in which this entity has a 90 per cent interest or more.VAT
Asset deals should in principle be exempt from VAT. However, there are some exceptions in which VAT at a rate of 21 per cent applies. The VAT treatment of the real estate depends on the specifics of each individual property and should be determined on a case-by-case basis. As stated above, the transfer of real estate is exempt from VAT unless the real estate qualifies as newly constructed or building land or the seller and purchaser opt for a VAT taxable transfer.
Opting for a VAT taxable transfer is only possible if the real estate will be used for purposes for which the buyer is entitled to deduct at least 90 per cent of the VAT. This criterion is only met if the buyer has actually started using the real estate for those purposes before the end of the financial year following the financial year of the acquisition. Parties must jointly opt for a VAT taxable transfer, by way of a declaration to that effect in the notarial deed of transfer or by filing a request with the Dutch tax authorities prior to the transfer. The request must be submitted to the tax authority competent for the transferor before the property is actually supplied or transferred. Since 2009, it has also been possible to include this option in the notarial deed. If the option is granted erroneously, the purchaser is liable for an adjustment of VAT arising from the exempt supply. However, if the purchaser appears to be insolvent, the supplier is held liable unless he or she can prove that he or she acted in good faith.
In a decree dated 19 September 2013, the State Secretary for Finance approved the option of a VAT taxable transfer for part of a property that can be used or operated independently.5
When real estate is acquired or developed it is subject to VAT; this input VAT may initially be reclaimed if the real estate is intended to be used for VAT taxable activities. However, if the property is (partially) used for VAT-exempt activities, the reclaimed VAT may have to be repaid. This needs to be assessed for a certain period (the VAT revision period). This period runs from the financial year in which the real estate was first taken into use plus nine subsequent financial years.
If the real estate is part of a transfer of a totality of assets, also referred to as a 'transfer of a going concern', Article 37d of the VAT Act provides that the transfer is not neglected for VAT purposes and the buyer takes on the VAT position of the seller. If the transfer of the real estate is taxed with VAT, either by operation of law or as a result of a VAT option, a new revision period will start for the buyer. However, if that transfer is considered to be a transfer of going concern, the current revision period will be continued by the buyer. It is generally accepted that Article 37d of the VAT Act can be applied to transfers of leased real estate. As the buyer takes on the VAT position of the seller, the seller should inform the buyer of the amount of input VAT related to the previous acquisition of the real estate. This rule and its application are subject to case law and in certain circumstances it may be advisable to obtain certainty from the Dutch tax authorities before the actual transfer of the real estate.Exemptions
It is possible that both VAT and real estate transfer tax are due on the same transfer of real estate. If VAT is due, the Legal Transaction (Taxation) Act provides for an exemption of real estate transfer tax, if:
- the transfer is taxed with VAT by operation of law (and not by way of opting for a VAT taxable transfer) and at the time of acquisition the real estate has not been used as a business asset (e.g., leasing of real estate) or it qualifies as building land; or
- the transfer is taxed with VAT by operation of law (and not by way of opting for a VAT taxable transfer) and at the time of the acquisition the real estate has been used as a business asset but the buyer is not entitled to a full or partial deduction of the input VAT incurred.
Generally, the above-mentioned exemption from real estate transfer tax does not apply if at the time of the acquisition the real estate has been used as a business asset and the buyer is entitled to a (partial) deduction of input VAT. However, the exemption from real estate transfer tax does still apply if all the following requirements are met:
- the real estate is leased or used within the business of the seller and the acquisition takes place within six months of the date of first use by the seller (or, if earlier, the commencement date of the lease);
- a notarial deed for the transfer is executed within six months of the date of first use; and
- the transfer is taxed with VAT by operation of law, unless no VAT is levied because the transfer takes place within a fiscal unity for VAT purposes or because the transfer qualifies as a transfer of a going concern.
In some specific circumstances, tax benefits may be gained from completing a transaction within a certain time frame following a previous transaction, before a certain point in time or other action. Sometimes, the tax benefit is such that the parties agree that the entire transfer is dependent on being able to take advantage of this tax benefit. However, it may not always be possible for the transaction to be fully completed as envisaged within the required time frame (e.g., because the buyer cannot obtain or transfer the necessary funds in time). In those instances, it has become more or less customary to agree that the transfer will be completed but subject to a condition subsequent, which is included in the deed of transfer (e.g., the payment of the funds at a specified later date). When the condition subsequent is not fulfilled, the transfer is annulled and the property reverts back to the seller by operation of law. In such a sale of property, the buyer becomes the holder of a conditional interest in the property (with the seller retaining a conditional interest) and therefore the buyer can only dispose of this conditional interest. Non-fulfilment of the condition subsequent can be invoked by the seller against any third party having obtained its interest in the property from the buyer.Corporate income tax
Capital gains realised on the sale of real estate assets in principle lead to taxable profit. However, capital gains on disposal of depreciable assets may be carried over to a special tax deferral reserve (the reinvestment reserve). As a result, no corporate income tax is due on the capital gains. The reserve must be deducted from the acquisition costs of subsequent acquired assets and the fiscal book value of these assets will consequently be reduced. The capital gains may only be carried over to the reinvestment reserve if there is an intention to reinvest in new assets. The reserve cannot be maintained for more than three consecutive years. If the reserve has not been fully utilised within three years or the intention to reinvest in new assets no longer exists, the remainder will be subject to corporate income tax.
Non-depreciable assets or assets depreciable in more than 10 years have to meet the replacement requirement. The capital gains on disposal of these durable assets may only be carried over to the reinvestment reserve if the new acquired asset has the same economical function. Real estate qualifies as a durable asset and consequently has to meet the replacement requirement. The reinvestment reserve is a reserve for tax purposes and will not be taken into account in the commercial annual accounts of the taxpayer.Permanent establishment
Immovable property situated in the Netherlands is deemed to constitute a permanent establishment if it belongs to the business assets of a non-resident company. Consequently, foreign investors are subject to Dutch corporate income tax insofar as they directly own real estate in the Netherlands or related rights, such as options, usufruct or leaseholds. As a result, income from real estate situated in the Netherlands as well as income from rights relating to real estate such as rental payments and capital gains, will be subject to corporate income tax at a rate of 25 per cent.6iv Acquisition of shares in a real estate companyReal estate transfer tax
In principle, the acquisition of shares falls outside the scope of real estate transfer tax. However, a transfer of deemed real estate assets is subject to real estate transfer tax. Deemed real estate assets include shares in a legal entity qualifying for both the asset test and the purpose test (defined below). If both tests are met, the company qualifies as a real estate company.
The asset test is met if at least 50 per cent of the real estate entity's assets consist of real estate and at least 30 per cent of the assets consist of Dutch real estate. The purpose test is met if at the moment of the transfer of the real estate asset or at any moment in the year preceding the transfer, at least 70 per cent of the real estate asset (taken as a whole) is or was instrumental in the acquisition, disposal or exploitation of this real estate asset. Once a company no longer meets the asset and purpose tests, there is a one-year reference period before the company no longer qualifies as a real estate company.
If both the tests are met, real estate transfer tax is only due if the purchaser, together with its related companies and individuals, holds or will hold, pursuant to the same or a related agreement, an interest of at least one-third in the real estate entity upon acquisition (possession requirement).
In the case of a share transfer in a real estate entity, the tax base is the fair market value of the underlying Dutch real estate assets, regardless of any related liabilities in the real estate entity's balance sheet. A facility is available for successive acquisitions (within six months) of the same real estate. If the same real estate is acquired by another person within six months, the tax base is reduced by the amount of the tax base of the previous acquisition.VAT
The transfer of shares in a real estate company is not subject to VAT. Furthermore, it is not possible to opt for a VAT taxable transfer for a share transaction.Corporate income tax
Any gain of the disposal of shares in a real estate company realised by a Dutch resident corporate taxpayer is in principle subject to Dutch corporate income tax, unless the participation exemption applies. Under the participation exemption, profits derived from a qualifying investment in another company, either domestic or foreign, are exempt from corporate income tax. The participation exemption is applicable if:
- the Dutch taxpayer holds at least 5 per cent of the nominal paid-up capital of another company;
- that company is not considered an FBI; and
- the participation is not held as a mere portfolio investment. However, the participation exemption is still applicable if the participation is considered a 'qualifying portfolio investment', if one or both of the following criteria are satisfied:
- the participation is subject to a profit tax resulting in a reasonable taxation according to Dutch standards (subject-to-tax test); or
- less than 50 per cent of the participations' directly and indirectly held assets consist of low-tax, free portfolio assets (asset test).
For the purposes of the asset test, real estate assets are deemed to be non-portfolio assets. Real estate companies should therefore qualify for the Dutch participation exemption, meaning that dividends and capital gains derived from the alienation of shares should be exempt from taxation at the level of the Dutch shareholder.Stamp duty
The Netherlands does not levy stamp duty on shares.