What do properties used for residential/ farming, a law firm office and/or a dental practice have in common? According to the Dutch Supreme Court, all three may qualify as residential properties and would consequently be subject to a reduced Dutch real estate transfer tax (RETT) rate. In this article, the authors explore the definition of residential properties, and how the reduced rate may be extended to apply to non-residential properties as well.
Introduction to RETT
In the Netherlands, 6% RETT is in principle levied in respect of the acquisition of the legal and/ or beneficial ownership of:
- real estate located in the Netherlands or certain rights concerning such Dutch real estate (eg the right of usufruct)
- in certain cases, shares of real estate entities, or certain rights concerning existing qualified shares of real estate entities, and
- in certain cases, membership rights in associations or Dutch corporations, if such rights represent exclusive usage rights of Dutch real estate
In order to stimulate the Dutch housing market a reduced RETT rate of 2% was introduced in respect of residential properties as of 1 July 2011. The explanatory Memorandum to this new legislation states that residential properties are properties that are, by nature, intended for habitation. However, the Memorandum goes on to state that the mere fact that a property is inhabited does not automatically result in the property being considered a residential property and vice versa. In addition, a "negative list" has been provided containing properties that are explicitly excluded for qualification as residential properties. The most notable exception concerns care and nursing homes and hospitals. Following the introduction of the reduced rate, there have been a number of court cases, leading to four Supreme Court verdicts dated 24 February 2017.
As mentioned in the introduction, the cases revolved around a (converted) farmhouse, a law firm and a dental practice. All properties were originally built as residential properties, but have since been converted. The fourth case concerns a hospice.
According to the Supreme Court, the Memorandum does not (sufficiently) elaborate on the definition of "residential property". Furthermore, since the Memorandum explicitly states that habitation per se results in the qualification as "residential property", the qualification should be based on an objective basis. In this respect, the Supreme Court essentially provides the following qualification rules:
- Rule 1: Based on its features, has the property been designed and built with habitation as its purpose?
- Rule 2: Since construction, has the property been the subject of extensive refurbishment work?
"With each real estate acquisition - even of commercial real estate - it is crucial to consider whether the reduced RETT rate for residential properties is applicable."
- Rule 3: In the case of extensive refurbishment work, can the property be made suitable for habitation with minor modifications?
- Rule 4: Where the above rules do not provide a clear indication of the "nature" of the property, how is the property classified in public records (eg the land registry)?
Applying these qualification rules, the Supreme Court concluded that the properties should all be considered "residential properties", with the exception of one. The hospice, according to the Supreme Court, has features inherent to a nursing home (the Court refers to various working spaces such as the head nurse’s office and storage areas). Given that nursing homes are explicitly excluded in the Memorandum, the qualification rules are not applied.
The importance of refurbishments, or lack thereof
Following the Supreme Court cases, there have been a number of additional cases in the courts of first instance and courts of appeal. Most recently, the Amsterdam court of appeal ruled in a case of a former psychiatric hospital. The hospital has since been converted into a homeless shelter and, subsequently, student housing. As part of the conversion, locks were placed on various doors, additional walls were erected (in order to expand the number of dorms/rooms) and connections were installed for plumbing and utility meters. The students were housed under short term leases (between 1.5 and two years) with the aim of preventing squatting.
The Amsterdam court applied the Supreme Court qualification rules as follows:
- Rule 1: The property was designed and built as a hospital.
- Rule 2: The refurbishments did not substantially change the nature of the property, which is still a hospital. In this respect the Amsterdam courts noted that the kitchens were already part of the property at the time the property was used as a hospital.
The Amsterdam court concluded that the property should still be considered a hospital, and thus excluded from qualification as a "residential property". Interestingly, the court noted that the property was not actually inhabited and that the students were merely occupying the property as anti-squatters (which according to the Memorandum should not matter).
What do these five court cases tell us? First, they show the importance of the original intended use of properties. Even if a property is not or no longer actually used for inhabitation, it may still qualify as a residential property. Secondly, even if the property has undergone substantial refurbishments, the "nature" of the property may not have changed, provided the property can be made suitable again for habitation with minor modifications.
The Dutch tax authorities may object to the application of the reduced rate of 2%, resulting in fines being imposed and/ or interest charged. As a result, where the classification of a property is not clear, it is common practice to apply the 6% RETT rate and then file an objection with the Dutch tax authorities. The objection must be filed within five years of the acquisition of real estate rights. It should be noted that acquisitions made before 24 February 2017 may not benefit from the Supreme Court rulings.
With each real estate acquisition - even the acquisition of commercial real estate - it is crucial to consider whether the reduced RETT rate for residential properties is applicable.