i Investment vehicles in real estate
A real estate investment in the Netherlands can be structured in many ways, depending on the specific facts and circumstances. Commonly used Dutch vehicles to acquire real estate include the private limited liability company (BV), public limited liability company (NV), cooperative (Coop), mutual fund (FGR) and limited partnership (CV).
BVs, NVs and non-transparent FGRs can obtain the status of a fiscal investment institution (FBI) and benefit from a regime similar to regimes abroad for real estate investment trusts. Entities with FBI-status are subject to corporate income tax at a rate of zero per cent. Dividends distributed by the FBI are in principle subject to dividend withholding tax at a rate of 15 per cent.
For Dutch tax purposes, CVs and FGRs can either qualify as transparent or non-transparent. If the vehicle is considered transparent, all profits are attributed to the investors directly, meaning that no taxation takes place at the level of the vehicle.
Non-Dutch entities residing abroad are also often used to invest in Dutch real estate, mainly due to the fact that the Netherlands levies dividend withholding tax from distributions by entities residing in the Netherlands.
ii Property taxes
The ownership, transfer and investment in real estate may be subject to different forms of taxation in the Netherlands.
The ownership or use of real estate located in the Netherlands is subject to property tax, water board charges, sewerage charges and waste disposal charges. Certain property taxes are levied on the owner of the real estate, while others are levied on the user. An owner-occupier will be charged both. The municipal authority appraises the immovable property in order to determine the tax base for property tax purposes. The municipality reassesses the value of all properties each year. This value is the base of all taxation related to the property and is referred to as WOZ value.
Real estate transfer tax
The transfer of immovable property is in principle subject to real estate transfer tax at a rate of 6 per cent. A rate of 2 per cent applies to the transfer of residential real estate. Exemptions of real estate transfer tax are available if the transfer is subject to VAT or for subsequent transfers within a certain time frame.
A company with a balance sheet consisting of 50 per cent or more of real estate assets and a minimum of 30 per cent of immovable property in the Netherlands is considered to be a real estate company for Dutch tax purposes. By means of a legal fiction, shares in a real estate company are deemed real estate. This implies that the transfer of shares may also trigger real estate transfer tax provided that the transfer is a qualifying acquisition.
Corporate income tax
Capital gains derived from the disposal of Dutch real estate assets held as investment by Dutch corporate residents are subject to corporate income tax at a rate of 25 per cent.2
For Dutch corporate income tax purposes, the depreciation of real estate generally is determined on a straight-line basis, taking into account an estimated economic life and estimated residual value. The depreciable basis is the acquisition price of a building increased by capitalised acquisition costs (including real estate transfer tax) less the expected residual value of the property. Depreciation on real estate is allowed only to the extent that the tax book value of the property is higher than the WOZ-value and limited to the difference between those two values. The WOZ-value is often relatively close to the fair market value. As a result, depreciation on real estate will likely be limited to the fair market value of the real estate.
As stated above, depreciation can only take place until the tax book value of the real estate has reached 100 per cent of the WOZ-value. Until 2019, it was possible to depreciate to a tax book value of 50 per cent of the WOZ-value for real estate used by the owner. A transition rule has been provided for Dutch real estate that has been taken into use by the company less than three years prior to 1 January 2019. Further to the transition rule, the taxpayer can still utilise 50 per cent of the WOZ-value instead of 100 per cent, until it has used the real estate for three years.
Land may not be depreciated. However, land held in leasehold may be depreciated over the remaining term of the ground lease unless the ground lease is perpetual. If the ground lease is perpetual, no depreciation is possible.
Net rental income enjoyed by a Dutch corporate investor is subject to corporate income tax.
II ASSET DEALS VERSUS SHARE DEALS
i 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.
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.
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 acquisition 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.
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. A 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.
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.
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, if the fiscal unity is dissolved within six years after an intercompany transaction, this 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 is expected to have a significant impact on large investors in the Netherlands. 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 the higher amount 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 upon an earlier transfer of the same real estate asset, the tax base is reduced by the tax base applied to this earlier transfer, resulting in a tax base of merely the accrued value 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.
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 is also possible to include the option in the notarial deed. If the option is erroneously granted, the purchaser is liable for 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 they acted in good faith.
In its decree dated 19 September 2013, the state secretary of finance approved that it is also possible to opt for a VAT taxable transfer for part of a property that can be used or operated independently.5
When real estate is acquired or developed subject to VAT, this input VAT may initially be reclaimed if the real estate is aimed 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 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 is subject to case law and in certain circumstances it may be advised to obtain certainty from the Dutch tax authorities before the actual transfer of the real estate.
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 the real estate has not been used as a business asset (e.g., leasing of real estate) or qualifies as building land at the time of acquisition; or
- the transfer is taxed with VAT by operation of law (and not by way of opting for a VAT taxable transfer) and the real estate has been used as a business asset at the time of the acquisition 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 the real estate has been used as a business asset at the time of the acquisition and the buyer is entitled to (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 after 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 after the date of first use; and
- the transfer is taxed with VAT by operation of law, unless no VAT is taxed because the transfer takes place within a fiscal unity for VAT purposes or because the transfer qualifies as a transfer of 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 will revert back to the seller by operation of law. On 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 leads 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.
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.6
iv Acquisition of shares in a real estate company
Real 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 (both to be 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 to 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 with the tax base of the previous acquisition.
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, is 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 a 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-taxed, 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.
The Netherlands does not levy stamp duty on shares.
III REGULATED REAL ESTATE INVESTMENT VEHICLES
i Regulatory framework
The Dutch regime implementing the Alternative Investment Fund Managers Directive (2011/61/EU) (the AIFMD) is the legal regime that normally applies to real estate investment vehicles. The AIFMD regulates alternative investment fund managers (AIFMs) and alternative investment funds (AIFs). Certain exemptions apply, the most important ones being sheer corporate holding structures, namely when the only investors are parent undertakings, subsidiaries and sister companies of the AIFM, and single family offices, namely when the investors are a group of people connected by a close familial relationship.
Pursuant to the AIFMD, management companies are subject to registration or licensing depending on the size of all funds managed.
If the size of all funds managed does not exceed the threshold of €100 million (including leverage) or is less than €500 million on an aggregate basis, and assuming that the funds are closed-end for at least five years and no leverage at fund level applies, a Dutch management company is subject to registration with the Dutch Authority for the Financial Markets only. When registered, certain reporting requirements need to be met.
If one of the thresholds set out above is exceeded, a management company is subject to licensing and compliance with certain ongoing requirements, including the requirement to publish a prospectus and the requirements set by the AIFMD.
Finally, in the Netherlands, a distinction is made between an offer of participation in a fund to professional and retail investors. In addition to these licence requirements, there are additional requirements specifically aimed at protecting retail investors (the Dutch top-up retail regime).
ii Overview of the different regulated investment vehicles
Dutch funds are typically structured as the following vehicles, or a combination thereof:
- Dutch limited partnerships (CVs);
- Dutch private limited liability companies (BVs);
- Dutch public limited liability companies (NVs);
- Dutch cooperatives (Coops); or
- Dutch funds for mutual account (FGRs).
The CV is not a legal corporate entity, but a contractual agreement. However, Dutch law does contain some specific provisions applicable to CVs. The CV consists of managing partners and limited partners. Managing partners are jointly and severally liable for their debts in the CV. Limited partners are solely liable for the amount of capital that they have contributed to the CV.
The CV is used for tax-transparent structures and therefore serves as a flexible vehicle.
BV and NV
The BV and the NV are both legal corporate entities. This entails that, in principle, individuals are not personally liable for the entity's debts. The BV and the NV are quite similar vehicles, but there are significant differences. For example, the shares of the NV are publicly traded and the shares of the BV are transferred by means of a deed of a notary. Furthermore, the NV requires a start-up capital of €45,000, whereas the start-up capital for the BV is €0.01.
Both are non-transparent structures. The BV is a more flexible vehicle than the NV because it is subject to less mandatory law than the NV.
The coop is a collective corporate vehicle in which members pool inter alia their capital, manpower and resources to obtain a greater group benefit. The liability of its members can be excluded in the articles of association of the coop.
The coop is a non-transparent structure. It is quite comparable to a BV but has more flexibility. For example, the Coop is subject to less mandatory law than the BV and voting- and profit rights can be attributed to its members in different ways.
The FGR is not a legal corporate entity, but a sui generis contract. The FGR usually has two legal entities: the manager and the legal custodian. They operate the FGR and together issue the terms and conditions of the FGR. The liability of its investors depends on the terms in the contractual arrangements.
The FGR is a popular vehicle for setting up funds in the Netherlands. The FGR is used for tax-transparent structures and therefore serves as a flexible vehicle. In view of its sui generis contractual nature, no Dutch mandatory rules apply in respect of its provisions, inter alia, on governance, voting rights and other rights of investors, and the role of the manager.
iii Tax payable on acquisition of real estate assets
The Netherlands generally has the following tax regimes for investment funds:
- tax transparent FGRs or CVs;
- fiscal investment institutions (FBIs); and
- exempt investment institutions (VBIs).
If the fund is considered transparent for Dutch tax purposes, the investors will be subject to tax as if they were held the real estate directly.
The seller is generally subject to corporate income tax if it realises a capital gain relating to the sale of real estate assets. The capital gain may, under specific circumstances, be added to a special reinvestment reserve.
The Netherlands does not levy stamp duty. In addition, the acquisition of real estate assets by any of the regulated investment vehicles listed above is generally not be subject to VAT.
iv Tax regime for the investment vehicle
Under Dutch law, a CV is a contractual cooperative venture and does not possess legal personality. A CV will be disregarded and considered a non-taxable entity from a Dutch tax perspective if the CV complies with certain restrictions. In general, the CV can only maintain its transparency for tax purposes if the transfer of the participation in the CV requires prior consent from all other participants.
Similar to a CV, a Dutch FGR can either be tax transparent or non-tax transparent. If tax transparent, the FGR is not subject to corporate income tax and its distributions are not subject to dividend withholding tax.
In order for a FGR to qualify as transparent for tax purposes, it should have a closed character, meaning that the participations are not freely transferable other than to the FGR itself by way of redemption, or with the consent of all other participants.
'Open' FGRs are subject to corporate income tax and dividend withholding tax. However, they may be able to opt for the status of a VBI or FBI.
Before 1 January 2018, distributions by a Dutch coop were not subject to dividend withholding tax. As of 1 January 2018, distributions by holding coop to qualifying shareholders (i.e., an interest of 5 per cent or more) are subject to dividend withholding tax. A holding coop is defined as a coop whose activities in the year preceding the distribution, predominantly (i.e., 70 per cent or more) consist of holding equity participations or of financing-related parties.
Private companies and non-transparent FGRs can be eligible for the FBI-status. FBIs are subject to corporate income tax at a rate of zero per cent. A FBI is regulated if the shares are admitted to the market for financial instruments as defined under the Dutch Financial Markets Supervision Act (FMSA), the fiscal investment institution or its manager (as applicable) has a licence as referred to in the FMSA, or the fiscal investment institution or its manager is exempt from that licence requirement based on the FMSA.
For regulated FBIs, there may not be a single corporate (taxable or tax transparent) shareholder who holds an interest of 45 per cent or more in the FBI (also taking into account interests held by affiliates), unless that entity is a qualifying portfolio investment entity.7 In addition, Dutch resident entities may not own, together or with affiliates, an interest of 25 per cent or more in the FBI through non-Dutch resident entities. Moreover, individuals are not allowed to hold an interest of 25 per cent or more in the regulated FBI.
In addition to the FBI, the Netherlands has a specific regime for tax exempt fiscal institutions (VBI).8 The VBI is not subject to corporate income tax and its distributions are not subject to dividend withholding tax. The objective and actual activities of a VBI must consist of investing in financial instruments. This implies that VBIs are not allowed to invest in real estate and mortgage loans. Moreover, it is not allowed for a VBI to indirectly invest in Dutch real estate. However, an exception has been made for indirect investments in foreign real estate. To apply the VBI-regime, a formal request has to be filed with the tax authorities. Contrary to the FBI, VBIs are not eligible to enjoy treaty benefits, unless a double tax treaty would explicitly grant treaty benefits to a VBI.
The Dutch VAT Act provides for an exemption of management services of special investment funds. In its recently published policy of 22 March 2019, the state secretary of finance confirmed that the exemption is available to a fund if:
- the fund is financed by more than one participant;
- the funds contributed by the participants must be invested according to a policy of risk-spreading;
- the risk of the investment must be borne by the participants; and
- the fund must be subject to specific state supervision.
The last condition is relatively new and is a result of a decision of the Court of Justice of the European Union (C-595/13 – Fiscale Eenheid X). In its policy, the state secretary provides examples of funds subject to specific state supervision. For example, pension funds, undertakings for collective investment in transferable securities (UCITS) and investment institutions with a licence obligation or whose manager has a licence obligation under the FMSA are considered to be subject to specific state supervision. This implies that state supervision pursuant to the AIFMD would qualify as specific state supervision.
v Tax regime for investors
The tax regime for investors depends on the tax treatment of the underlying investment vehicle.
If the fund is transparent, all income will be attributed to the investors. This implies that no taxation takes place at the level of the fund. Subsequently, distributions by the transparent vehicle to its investors are not subject to dividend withholding tax.
Under the FBI regime, distributions from the FBI to its shareholders are in principle subject to dividend withholding tax at a rate of 15 per cent unless reduced by a bilateral tax treaty or exemption. The FBI has an obligation to distribute its (adjusted) profits to the investors by way of dividend within eight months after the financial year.
If the VBI regime is applicable, no dividend withholding tax is due on distributions from the VBI to the investors.
Dutch resident corporate investors will not be able to apply the participation exemption on its interest in a vehicle with FBI or VBI status. As such, capital gains realised will in principle be subject to corporate income tax.
IV REAL ESTATE INVESTMENT TRUSTS AND SIMILAR STRUCTURES
i Legal framework
The Netherlands does not have real estate investment trusts but has introduced the FBI regime, which is similar. FBIs are subject to corporate income tax in the Netherlands at a rate of zero per cent. Profit distributions by an entity with FBI status are in principle subject to dividend withholding tax at a rate of 15 per cent.
The FBI regime is open to Dutch NVs, BVs and mutual funds. In addition, similar entities incorporated under the laws of the BES islands, Aruba, Curaçao, Sint Maarten, or under the law of a Member State of the European Union can also qualify for the FBI status. This also applies to similar entities incorporated under the law of a third country with which the Netherlands has concluded a bilateral tax treaty, provided that the bilateral tax treaty includes a non-discrimination clause.
The FBI does not require listing on a stock exchange. However, whether an FBI is regulated does affect the shareholder restrictions. More lenient conditions apply to regulated FBIs.
ii Requirements to access the regime
No formal request has to be filed to benefit from the FBI regime. The following conditions have to be met in order to be eligible for the FBI regime:
- the FBI must have a specific legal form (as described above);
- the purpose and actual activities of the FBI must consist of holding passive investments;
- the FBI must distribute its adjusted profits to its shareholders within eight months following the end of the relevant financial year;
- the profits must be distributed to its shareholders on a pro-rata basis;
- the maximum debt leverage allowed is 20 per cent of the fair market value of non-real estate assets and 60 per cent of the fair market value of real estate assets; and
- certain shareholder restrictions apply, which are different for regulated and private FBIs.
An entity that meets the above-mentioned conditions qualifies as a FBI at the beginning of the next financial year. The tax authorities will not issue a separate decision stating that the entity may enjoy the FBI regime. The application of the FBI regime will be confirmed by the Dutch tax authorities upon issuing the tax assessment of the relevant year. If the Dutch tax authorities have not applied the FBI regime (i.e., zero per cent corporate income tax rate), the FBI status can be enforced by way of filing a notice of objection. In practice, the taxpayer will enter into discussions with the Dutch tax authorities prior to applying the FBI regime.
iii Tax regime
At the end of the year preceding the year that the entity obtained the status of FBI, all assets are revaluated at fair market value. The capital gain resulting from revaluation is subject to the regular corporate income tax rate of 25 per cent.9
The purpose and actual activities of the FBI must consist of holding passive investments. Investment activities may, however, include real estate or investments of a financial nature (such as loan notes, shares or other securities). The FBI regime generally does not allow activities such as trading in real estate or real estate development. However, a real estate fund with FBI status is allowed to engage in property development for its own investment portfolio, provided that the activities related to the development of the property are carried out in a separate taxable subsidiary. If existing properties are renovated, this does not qualify as development activity provided that the capital expenditure is less than 30 per cent of the fair market value before the renovation.
The maximum debt leverage allowed for FBIs is equal to the sum of 20 per cent of non-real estate assets and 60 per cent of real estate investments (all determined on the basis of tax book values). Interests in companies that consist of at least 90 per cent of real estate are considered real estate.
A distinction must be made between regulated and private FBIs. The FBI qualifies as a regulated FBI if its shares are officially listed on a stock exchange and if it holds a permit to issue shares to the public. After the implementation of the AIFMD, a larger group of FBIs qualify as a regulated FBI (see Section III.iv).
In principle, at least 75 per cent of the investors in a non-regulated FBI should comprise:
- entities not subject to tax on their profits or exempt from tax, with the profits also not being subject to tax at the level of the shareholders or participants of those entities; or
- regulated FBIs.
No individual may hold a substantial interest in the FBI (i.e., an interest of 5 per cent or more). In addition, Dutch resident entities may not hold an interest of 25 per cent or more in the FBI through non-resident mutual funds or through non-resident entities with a capital fully or partly divided into shares. Investors are not able to apply the participation exemption on their interest in the FBI, despite holding 5 per cent or more of the paid-up share capital of the FBI. As a result, capital gains and dividends derived from the FBI are taxable at the level of the Dutch corporate shareholder.
As the FBI is subject to corporate income tax (although at a rate of zero per cent), it can enjoy treaty benefits under double taxation agreements.
Dividends distributed by a FBI are in principle subject to dividend withholding tax at a rate of 15 per cent unless an applicable tax treaty reduces the dividend withholding tax rate or a domestic exemption applies. In addition, Dutch dividend withholding tax due by the FBI may be reduced by Dutch and foreign withholding tax levied on dividends or interest payments received by the FBI subject to certain limitations. Qualifying distributions out of a reinvestment reserve are not subject to dividend withholding tax.
As stated above, the FBI is obliged to distribute equally its adjusted profits to the shareholders. Its adjusted profits include all profits other than the balance of realised capital gains and capital losses that can be added to a special reinvestment reserve. This implies that the FBI may not have separate classes of shares. It is, however, allowed to create different share classes for specific purposes, such as differences in currency, marketing costs and management fees. The Dutch state secretary of finance allows different share classes if the following conditions are met:10
- the FBI keeps track of the contributions to the reinvestment and rounding-off reserve per class of share;
- the exemption of dividend withholding tax from distributions from the reinvestment reserve will be applied in accordance with point (a) as described above;
- the shareholder requirements are met on an overall basis (i.e., not on a share class basis); and
- the creation of the different classes of shares is not aimed at avoiding dividend withholding tax.
An exemption from dividend withholding tax exists for distributions from the reinvestment reserve and for buy-backs of shares.
iv Tax regime for investors
Profits are taxed at the level of the shareholder. A strict distribution requirement of dividends exists for FBIs. An FBI must distribute its adjusted profits on a pro rata basis within eight months following the end of the relevant financial year. Adjusted profits implies that the FBI only has to distribute its current income (i.e., dividends, interest and rental income). Realised gains and unrealised gains on securities do not have to be distributed. These types of income can be added to a special reinvestment reserve.
Dividend distributions by the FBI to its shareholders are subject to dividend withholding tax at a rate of 15 per cent unless domestic law or a treaty provides for an exemption or a reduced rate. In addition, Dutch dividend withholding tax due from the FBI may be reduced by Dutch and foreign withholding tax levied on dividends or interest payments received by the FBI, subject to certain limitations. Payments from the reinvestment reserve are not subject to dividend withholding tax.
Individuals may not own an interest of 5 per cent or more in the FBI. As such, they will not hold a substantial interest within the meaning of the Personal Income Tax Act. This implies that the interest in the FBI of Dutch resident individuals is taxed as portfolio investment for Dutch personal income tax purposes (i.e., a deemed return against a rate of 30 per cent). However, individual taxpayers should be able to credit the dividend withholding tax withheld on distributions against their Dutch personal income tax liability. Non-resident individuals are in principle not subject to tax in the Netherlands with respect to their shareholding in the FBI.
Shareholders are not able to apply the participation exemption on their interest in the FBI. Capital gains realised and dividends received by Dutch corporate investors are therefore subject to Dutch corporate income tax at a rate of 25 per cent.11 Non-Dutch corporate shareholders with an interest of 5 per cent or more should only be subject to Dutch corporate income tax if the foreign shareholder taxation rules apply. This is the case if the substantial interest of 5 per cent or more cannot be allocated to an active enterprise provided that anti-abuse provisions apply, namely that:
- the interest is held with the main purpose or one of the main purposes being to avoid the income tax of another person (the subjective test); and
- there is an artificial arrangement or transaction, or series of arrangements or transactions, which is generally the case if it is not based on sound business reasons (the objective test).
v Forfeiture of REIT status
An entity forfeits its qualification as FBI as from the moment the statutory requirements for the regime are no longer fulfilled. The forfeiture of FBI status during a financial year has retroactive effect as from the beginning of the financial year. If the entity does not meet the profit distribution condition, its FBI status will forfeit as of the beginning of the financial year relating to the profit distribution. In theory, this means that the forfeiture of the FBI status can have a retroactive effect of 20 months.
In principle, no revaluation takes place at the end of the FBI regime. However, a rounding-off reserve (if applicable) will be released, resulting in a taxable gain against the regular corporate income tax rate of 25 per cent. The reinvestment reserve will not be released.
The forfeiture of the FBI status does also affect the shareholders of the former FBI. For instance, the shareholder restrictions resulting from the FBI regime no longer apply. This means that after the forfeiture of the FBI status, individual shareholders may acquire a larger interest in the former FBI. For Dutch corporate residents, the forfeiture of the FBI status may lead to the application of the participation exemption in its interest in the former FBI. However, the corporate shareholder will not be able to apply the participation exemption on dividends received within eight months after the forfeiture of the FBI status.
V INTERNATIONAL AND CROSS-BORDER TAX ASPECTS
i Tax treaties
The Netherlands has an extensive treaty network reducing withholding taxes on dividends, interest and royalties. It has concluded 94 bilateral income tax treaties and listed 82 of those treaties to be brought within the scope of the Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Shifting (MLI). In addition, the Netherlands is re-negotiating some of its existing bilateral income tax treaties and negotiating some new bilateral income tax treaties. If the Netherlands has not concluded a tax treaty with the country concerned, domestic law in the form of the Double Taxation (Avoidance) Decree (2001) applies. Application of this decree will also result in the avoidance of double taxation.
Most treaties concluded by the Netherlands (but not all) are fully based on the OECD Model Convention. According to Article 6 of the OECD Model Convention, income derived from immovable property may be taxed in the state where the immovable property is located. The OECD extends the scope of the definition of immovable property by adding examples of cases that are deemed to constitute immovable property. These include:
- goods that belong to the immovable property;
- livestock and forestry holdings (including such items as tools, vehicles and mobile irrigation systems, as well as animals and plants);
- rights to which the provision of private law regarding land ownership apply;
- the right of usufruct on immovable property; and
- rights on variable or fixed compensation with regard to the exploitation of mineral layers, sources and other natural sources.
'Income derived from immovable property' is neither defined in the OECD Model Convention nor in the accompanying commentary. The method of determining the income is also not explained. It is stated, however, that the form of exploitation of the immovable property is irrelevant, and that this, in any case, includes income derived from the direct usage, rental or leasing of the immovable property. Income derived from immovable property that is part of the income of a company or permanent establishment would also fall within the scope of the provision.
Article 13 of the OECD Model Convention provides that the right to tax capital gains derived from the alienation of immovable property is allocated to the state where the immovable property is located. Most treaties concluded by the Netherlands contain a similar provision.
The Netherlands signed the MLI on 7 June 2017 and has largely accepted the provisions, subject to limited reservations. On 20 December 2017, The Netherlands published a legislative proposal for the ratification of the MLI, which has been approved by the parliament. As the Netherlands has deposited the ratification bill with the OECD on 29 March 2019, the MLI ratification and notification process has been finalised. As a result, the MLI will have a general entry into effect for the Netherlands as from 1 January 2020.
Following the implementation of the MLI, the most important changes with respect to Dutch bilateral tax treaties are:
- the amendment of the preamble and the inclusion of the Principal Purpose Test;
- specific anti-avoidance provisions in relation to withholding tax on dividends and certain real estate transactions;
- the adoption of a tie-breaker test to determine the tax residence for dual resident entities in a mutual agreement procedure;
- measures to ensure consistent tax treatment where entities are treated as being transparent or opaque by different countries;
- measures to deal with avoidance of permanent establishment status, although the Netherlands have made a temporary reservation with respect to Article 12 of MLI on commissionaire arrangements; and
- measures to resolve disputes more efficiently, including the minimum standard mutual agreement procedure and mandatory binding arbitration.
In relation to real estate, the Netherlands has adopted Article 9 of MLI on the improper use of treaty provisions (similar to Article 13(4) of OECD Model Convention), with the result that gains derived by a resident of a treaty state from the alienation of shares or other rights that derive more than a certain part of their value from immovable property may be taxed in the other treaty country, where the immovable property is located. Pursuant to Article 9 MLI, the criteria are tightened up to make it more difficult to avoid treaty provisions regarding the alienation of shares in immovable property companies. As a result of Article 9 MLI, a retrospective 365-day period with regard to the relevant value threshold in the definition of immovable property company is included. Further, the Netherlands have also decided that comparable interests to shares fall within the scope of the Article 13(4) of the OECD Model Convention. The provision will only be effective if the treaty partner makes the same choice.
ii Cross-border considerations
Dutch law makes no distinction between Dutch and foreign investors. In principle, they are treated equally. Consequently, there are no restrictions on cross-border investments such as exchange controls, and limits on foreign direct and indirect investment in real estate.
iii Locally domiciled vehicles investing abroad
As a starting point, an entity incorporated under Dutch law is deemed resident in the Netherlands for tax purposes regardless of its place of effective management. Consequently, the entity is subject to Dutch corporate income tax on its worldwide income. If the place of effective management is located outside the Netherlands, that country may also claim that the entity is tax resident within its jurisdiction. In that event, the applicable double tax treaty generally determines that the entity is a tax resident in the country where its place of effective management is located. This is done through the corporate tie breaker and often a mutual agreement procedure.
From a Dutch tax perspective, the place of effective management should be determined by taking into account all facts and circumstances. Based on case law, the place of effective management is located where the most important decisions are made. On that basis, the Dutch legislator issued a decree that provides for minimum substance requirements.12 The current substance requirements are:
- at least half of the total number of board members with decision-making power should be residents of the Netherlands;
- the Dutch resident board members should have the professional knowledge and skills to properly perform their duties, which must at least include the decisions regarding the company's transactions and follow-up;
- the company should have adequate support to run its business;
- the most important board decisions of the company should be made in the Netherlands;
- the principal bank account of the company must be maintained in the Netherlands;
- the bookkeeping of the company must take place in the Netherlands;
- the business address of the company must be in the Netherlands;
- the company must comply with all its tax obligations in the Netherlands and not be treated as a tax resident of another country; and
- the company must run a real risk with respect to its financing, licensing or leasing activities, with an equity at risk that corresponds to the functions performed.
It is advisable (and in the case of service companies required) to meet the substance requirements to ensure that the company is treated as a tax resident of the Netherlands and that its tax residency is less likely to be disputed by a foreign taxing authority.
An advantage of seating the entity in the Netherlands is the treaty network of the Netherlands. Given the fact that most bilateral tax treaties allocate the right to levy tax on real estate to the jurisdiction in which the real estate is located, the Dutch resident entities are generally exempt from tax in the Netherlands.
VI YEAR IN REVIEW
Under the Dutch fiscal unity regime, a Dutch-resident parent company and its Dutch resident subsidiaries may form a consolidated group for Dutch tax purposes.13 The main feature of the fiscal unity regime is that losses of one company can be offset against profits of another company included in the fiscal unity. In addition, intercompany transactions, such as the transfer of assets and group loans, are ignored for tax purposes.
On 23 April 2019, the Dutch Senate adopted a legal proposal introducing certain anti-abuse provisions to the fiscal unity regime for Dutch corporate income tax purposes. Based on the proposal, a number of provisions of the corporate income tax act and dividend withholding tax have to be applied as if the fiscal unity does not exist. As a consequence of the repair measures, a number of benefits of the current fiscal unity regime are no longer available. This can have a severe impact on the tax position of taxpayers that currently apply the Dutch fiscal unity regime.
This proposal is a result of a decision of the European Court of Justice that the fiscal unity regime breaches the freedom of establishment. As a result of the approval of the Dutch Senate, the repair measures will be implemented in Dutch law with retroactive effect to 1 January 2018.
The Dutch government announced that it is exploring new group regime alternatives to replace the fiscal unity regime.
The Dutch tax regime is undergoing significant changes as a result of the OECD Base Erosion and Profit Shifting project and related EU directives.
The EU Anti-Tax Avoidance Directive interest limitation rules are likely to have a big impact on corporate investors in Dutch real estate. On 1 January 2019, the Netherlands implemented the earnings stripping rule, also known as the 30 per cent EBITDA rule. This rule implies that the deduction of net interest will be limited to the highest of 30 per cent of the EBITDA or €1 million. The EBITDA is calculated on the basis of tax accounts and excludes tax exempt income such as dividend income from qualifying participations or income that is allocated to a foreign permanent establishment (including real estate located abroad). The earnings stripping rule applies per taxpayer, which implies that the €1 million threshold applies only once per fiscal unity.
Another future development is the introduction of a conditional withholding tax on interest and royalty payments as of 1 January 2021 in abusive situations.
1 Rob Havenga is a partner and Sandrine Lekkerkerker is an associate at Houthoff.
2 19 per cent for taxable profits up to €200,000.
3 19 per cent for taxable profits up to €200,000.
4 The Netherlands also has a fiscal unity concept for VAT purposes.
5 Decree 19 September 2013, No. BLKB2013/1686M.
6 19 per cent for the first taxable profits up to €200,000.
7 Generally, this is an UCITS or FBI.
8 The VBI-regime is only open for NVs, mutual funds or similar foreign vehicles.
9 19 per cent for the first €200,000 of profits.
10 Decree state secretary of finance dated 18 February 2014, No. BLKB 2016/99M.
11 19 per cent on the first €200,000 of profits.
12 Decree of the Dutch state secretary of finance of 3 June 2014.
13 A number of conditions apply in order to be able to form a fiscal unity, such as a holding requirement of at least 95 per cent.