Real estate tax changes will affect funds, developers and sellers, and private individuals.
So far, 2023 has been a year full of tax developments for the Dutch real estate (RE) market. Besides the increase of the real estate transfer tax (RETT) rate to 10.4% this year (also for residential real estate owned by investors), there are a lot of other proposed changes that impact the Dutch RE market. These include in relation to RE funds, the development and sale of RE and for private individuals.
Real estate funds
Abolishing the Dutch REIT regime
The Dutch real estate investment trust (REIT) regime allows for a 0% corporate income tax rate for Dutch fiscal investment institutions (fiscale beleggingsinstelling or FBI) investing in Dutch RE, subject to specific conditions.
In March 2023, a legislative proposal to abolish the Dutch REIT regime was published for public consultation. Under the proposal, an FBI may no longer directly invest in RE (and thus benefit from the 0% rate) and as a result, the Dutch REIT regime will be abolished.
The proposal provides for a specific temporary real estate transfer tax (RETT) exemption – that applies during 2024 and subject to certain conditions – for situations where the economic ownership of the RE should be restructured to establish a tax transparent and tax neutral structure as a result of the abolition of the Dutch REIT regime. (Please see our earlier Insight in which this proposal is described in more detail in relation to a typical restructuring.)
The legislative proposal is likely to be included in the 2024 Tax Plan (Belastingplan 2024) that will be published on 19 September 2023 (Dutch Budget Day 2023), with entry into force from 1 January 2025. The abolition is expected to have a significant impact on existing investment structures and we are already seeing restructurings of FBIs to tax transparent fund structures.
Abolishing the €1 million threshold under the Dutch EBITDA-rule
Currently, the Dutch earnings before interest, taxes, depreciation and amortisation (EBITDA) rule limits the deductibility of net interest costs for Dutch corporate income tax purposes to the highest of: (1) 20% of the EBITDA of a taxpayer and (2) €1million. This means that, in practice, every taxpayer can deduct at least €1million of net interest costs during a year.
In the spring memorandum 2023 (voorjaarsnota 2023) it is proposed that as of 1 January 2025 the €1 million threshold will no longer apply to entities with real estate leased out to third parties. Accordingly, interest deduction for these entities would thus be limited to the 20% EBITDA threshold.
The legislative proposal is expected to be included in the 2025 Tax Plan (Belastingplan 2025) that will be published on 17 September 2024 (Dutch Budget Day 2024).
Amending the RETT demerger exemption
The acquisition of RE as part of a legal demerger is exempt from RETT, subject to certain conditions. Besides the RETT demerger exemption, other restructuring facilities could be available for taxpayers to accommodate a tax neutral reorganisation. However such restructuring facilities (such as the RETT merger exemption and the internal reorganisation exemption) provide for more stringent conditions compared to the RETT demerger exemption.
In the spring memorandum it was proposed to align the conditions for the RETT demerger exemption with the conditions for the other restructuring facilities. The Dutch government's objective is to avoid the RETT demerger exemption being applied in situations where it is intended to (ultimately) sell the real estate to a third party.
The spring memorandum 2023 does not contain a timeline for the amendment to enter into force. We expect the legislative proposal to be included in the 2024 Tax Plan (Belastingplan 2024) that will be published on 19 September 2023 (Dutch Budget Day 2023).
Development and sale of real estate
'Old' versus 'new' RE
For Dutch value added tax (VAT) and RETT purposes a distinction has to be made between "old" and "new" RE. The sale of old RE is, in principle, exempt from VAT and subject to RETT. The sale of new RE is subject to VAT (21%) and exempt from RETT (subject to conditions).
"Old" RE is RE that has been used for more than two years after first occupation (eerste ingebruikneming). "New" RE is RE that has not been used yet (that is, before first occupation) or has been used for a short period after first occupation.
"Old" RE can become "new" again if is refurbished/renovated in such a way, that, in essence, "new" RE is created that did not exist before the refurbishment/renovation (in wezen nieuwbouw).
In November 2022, the Dutch Supreme Court ruled that only changes to the structural construction of an existing building, including replacement of a part of the existing foundation of a building, could merit the conclusion that a renovation was so extensive that in essence "new" RE is created. Other elements, such as changes to the exterior of a building, its function, the extent of the capex and the increase in value created with the renovation, can be indications of the creation of "new RE", but they are not decisive.
In practice this means that, as the bar has been set high by the Dutch Supreme Court, it may be difficult for refurbished/renovated RE to qualify as "new". Furthermore, the open norm (changes to the structural construction) leaves room for interpretation and is highly fact driven (to what extent would a renovation be "so extensive" that in essence "new" RE is created?). Lastly, in our view, this position seems too strict looking at recent EU case law but, for now, the Dutch tax authorities have to follow this ruling.
Sale of 'new' RE via shares – exclusion of the RETT concurrence exemption (samenloopvrijstelling)
As described above, the sale of new RE is subject to VAT (21%) and exempt from RETT (subject to conditions) due to the RETT concurrence exemption.
If the new RE is used for VAT-exempt purposes (such as residential or healthcare RE), the purchaser cannot reclaim the paid VAT. To avoid this VAT cost (but also for many other reasons), a sale of new RE via a share sale is often considered. Currently, a sale of new RE via a share sale is VAT-exempt but may still benefit from the RETT concurrence exemption based on the so-called “look through” approach (introduced by the Dutch Supreme Court).
The Dutch government had proposed to exclude the application of the RETT concurrence exemption for such situations. Consequently, under the proposed rules, 10.4% RETT will be due in case of a sale of new RE via share sale.
However, on 23 June, the Dutch State Secretary for Finance published a letter regarding the new proposed law which announced a transitional law to prevent "overkill" and other undesirable outcomes.
To prevent overkill
- The RETT concurrence exemption can still be applied in share deals where the underlying "new" RE (that is represented by such shares) is used for 90% or more for VAT-taxed purposes (for example, a VAT-taxed lease) for the first two years after the acquisition. In such situations, there is, in the view of the State Secretary for Finance, no VAT-saving construction that must be combated (as the purchaser would also be able to reclaim the VAT if it had acquired the "new" RE via an asset deal).
- Furthermore, the RETT rate for share deals involving "new" RE that will be used for 10% or more for VAT-exempt purposes will be set at a maximum of 4% (instead of 10.4%). This is because, in the view of the State Secretary for Finance, for many transactions the cumulative tax burden (that is, the 4% RETT and the non-recoverable VAT during the construction phase) would then end up to approximately 21%. This corresponds to the VAT rate of 21% that would have been levied on "new" RE if transferred via an asset deal. Whether this RETT rate may be further reduced is still unclear. The wording "a maximum of 4%" may suggest that in certain circumstances the rate could also be set lower but the letter does not elaborate further on that.
Transitional law/effective date
- Current projects should be grandfathered under transitional law. These are defined as those projects for which a signed letter of intent is in place at the moment the bill is submitted to Parliament – expected in the 2024 Tax plan (Belastingplan 2024) that will be published on Tuesday 19 September 2023 (Dutch Budget Day). The letter mentions that the transitional law shall not apply to acquisitions made after 1 January 2030.
- Furthermore, the letter mentions that the envisaged entry into force date of these rules will be 1 January 2025.
If the letter is followed, only "new" RE that will be sold via a share sale and will be used for more than 10% for VAT-exempt purposes (for the first two years after the acquisition) would no longer benefit from the RETT concurrence exemption. In such situation, in principle, 10.4% RETT would be due.
Upon the entry into force of this new rule it may be worthwhile for developers to investigate whether "new" RE, that will be used for VAT-exempt purposes, may be transferred via an asset sale and may benefit from the VAT transfer of going concern regime. The Arnhem-Leeuwarden Court of Appeals ruled in May 2022 that, in those specific cases, the VAT transfer of going concern regime should apply to leased out RE (albeit that such RE was developed for the market by a RE developer).
Introduction of a VAT revision period for renovation works
VAT due on renovation of RE where the renovation has not resulted in "new" RE can be fully reclaimed if (in brief) the RE is used for VAT-taxed purposes in the year the renovation took place. No VAT revision periods apply for renovated RE (that does not qualify as "new" RE). Consequently, if old RE is used in that year for VAT exempt purposes (such as residential or healthcare RE) the VAT due on those renovation works is not recoverable and becomes a cost for the landlord/owner. To avoid this VAT cost, landlords/owners in practice ensure the use of the renovated RE for a short period of time for VAT taxed purposes (for example, short stay housing or other short term VAT-taxed use).
In the spring memorandum 2023 it was announced that the Dutch government is currently exploring the introduction of a VAT revision period for renovated RE that will not qualify as "new". This to avoid VAT due on such renovation works being fully deductible in situations where the RE is used for a short period for VAT-taxed purposes and afterwards for VAT-exempt purposes.
The spring memorandum does not contain a timeline. For now we note that the introduction of such a VAT revision period for renovation works would increase the administrative burden of taxpayers significantly.
In 2023, taxation in Box 3 (income from savings and investments) is based on deemed returns and a flat tax rate. The deemed return for 2023 is now set at 6.17% of the RE WOZ-value (value assessed according to the Valuation of Immovable Property Act, or Wet Waardering Onroerende Zaken) and 2.57% for debts (the percentage for debt is still provisional).
The flat tax rate will gradually increase from 32% in 2023 to 34% in 2025. Generally speaking, these rules result (expectedly) in a higher Box 3 taxation for private individuals holding RE as investment compared to previous years.
Business succession facilities
The Dutch business succession facilities (bedrijfsopvolgingsregelingen) aim to ensure the continuity of a business by providing specific tax exemptions and a rollover relief for business successions. Among other changes, it is now proposed, for clarity purposes, to exclude leased out RE to third parties from the Dutch business succession facilities. Short stay use of RE in the service sector, such as hotel rooms, cafes, restaurants, bowling alleys and tennis and squash courts are not covered by the exclusion and may still benefit from the facilities.
The legislative proposal will likely be included in the 2024 Tax Plan (Belastingplan 2024) that will be published on 19 September 2023 (Dutch Budget Day 2023).
These proposed changes could have a significant impact on existing RE funds and RE development/renovation projects (in particular in relation to residential RE projects).
The Osborne Clarke tax team is happy to assess the impact of the proposed rules on existing RE funds and RE development/renovation projects and the scope for potential restructuring alternatives.
If you would like to discuss these issues, please get in touch with your usual Osborne Clarke contact, or one of our experts below.