Dutch real estate market in 2024 – update on relevant tax developments

Bartjan Zoetmulder

Loyens & Loeff, London/Amsterdam

bartjan.zoetmulder@loyensloeff.com

Jim Leijen

Loyens & Loeff, London/Amsterdam

jim.leijen@loyensloeff.com

Jerome Ariës

Loyens & Loeff, London/Amsterdam

jerome.aries@loyensloeff.com

Introduction

The Dutch real estate market continues to be an important focus area for both domestic and foreign investors and developers. Although arguably not the key driver, taxation is an important element to consider as part of the return on investment. This article provides a high-level categorised overview of notable tax developments in Dutch case law, as well as of adopted and expected law changes, relevant for the Dutch real estate market.[1]

Interest deduction (limitation) and carry forward tax losses

Interest deduction limitation on (intragroup) financing of Dutch real estate

Spurred by recent developments in Dutch case law,[2] the deduction of interest expenses on intragroup financing has been an area of focus for the Dutch tax authorities.

Predominantly the arm’s-length nature of the applied interest rate is frequently debated, even when substantiated by a benchmark analysis. Business reasons underlying the granting of intragroup financing are queried, with a focus on the group’s overall debt-to-equity ratio, loan-to-value of the asset and the interest coverage ratio. In practice, to avoid lengthy discussions or even litigation with the Dutch tax authorities, taxpayers often compromise on (partial) non-deductibility of interest expenses. The reason being that intragroup interest expenses are generally also limited in deduction by the earnings stripping rule.

The earnings stripping rule is a general interest deduction limitation applicable to interest expenses on both intragroup financing and loans from third parties. This rule applies to all Dutch taxpayers subject to Dutch corporate income tax and is part of the Dutch implementation of the EU Anti-Tax Avoidance Directive.[3] Currently, the Netherlands already applies a relatively strict implementation, limiting the deduction of net borrowing costs to the higher of: (1) 20 per cent of the tax EBITDA; or (2) €1m. With the increasing market rate of interest, even interest on third party loans may be limited.

In practice, Dutch real estate portfolios are generally split across multiple property-owning companies to efficiently make use of the €1m threshold. To combat this ‘misuse’ in the eyes of the former Dutch Government, it was announced that the threshold will be abolished from 2025 for entities leasing Dutch real estate to a third-party. However, with the new Dutch Government coming in, there appears to be a stronger focus on the investment climate of the Netherlands and recognition of the importance of investments in real estate, especially where it concerns residential development and sustainability goals. The coalition agreement already stipulates that the EBITDA cap will go from 20 per cent to 25 per cent. There is the possibility that the €1m threshold will also remain, although also other suggestions have been voiced such as the introduction of a group escape, as in many other EU member states as this would allow external financing costs to remain (partially) deductible. Budget Day 2024[4] is expected to provide more clarity thereon.

Change of control – loss of ‘latent’ tax losses?

Based on the Dutch ‘change of control’ rules, a taxpayer’s available carry forward tax losses will, in principle, be lost following an ‘important’ (30 per cent or more) change in ultimate interest.[5] Generally, the acquisition of Dutch real estate through a share deal will result in any tax losses at the level of the acquired entity no longer being available for off-set against future taxable profits.

In a procedure currently pending with the Dutch Supreme Court, the question at hand is whether the scope of these change of control rules also includes unrealised losses. In the case at hand, the shares in a Dutch property-owning company were acquired, owning a portfolio of Dutch real estate assets, whereby the fair market value of a number of the properties had decreased approximately 20 per cent compared to the tax book value. As the properties were valued at cost price for Dutch tax purposes, this decrease in value had, however, not yet materialised at the time of the acquisition. Both the Court of Appeal[6] and Advocate-General[7] already concluded that such ‘latent’ tax losses should also fall within the scope of the change of control rules based on parliamentary history and therefore be lost upon an ‘important’ change in control. It is now up to the Dutch Supreme Court to provide a conclusive answer.

In practice, this pending procedure already has an effect on negotiations in relation to the value of a deferred tax asset in case of share deal.

Dutch REIT regime and new tax entity classification rules

Foreign investment fund not subject to corporate income tax on Dutch real estate income

On 14 June 2024, the Dutch Supreme Court[8] ruled that a German investment fund (Publikum Immobilien-Sondervermögen) directly owning Dutch real estate, was not subject to Dutch corporate income tax on its Dutch real estate income. The reason given was that the legal form of the German investment fund – a Sondervermögen – being comparable to a Dutch fund for joint account, did not qualify as an ‘other legal form with capital divided into shares’. Furthermore, due to the German investment fund having issued freely tradeable participation rights, which (economically) entitled its holders to the investment fund’s capital, it could also not be qualified as a so-called ‘special purpose fund’. Therefore, the German investment fund did not qualify for the exhaustive list of non-resident taxpayers[9] and thus was not subject to Dutch corporate income tax. Although the German investment fund had primarily taken the position that it should qualify for (the benefits of) the Dutch real estate investment trust (REIT) regime, the Supreme Court did not deal with this question.

 The Supreme Court ruling should similarly apply to other foreign legal forms, comparable to a Dutch fund for joint account, that directly invest in Dutch real estate and have issued participation rights that entitle its holders (ie, investors) to their capital. For the current and previous tax years, these comparable foreign legal forms should not be subject to Dutch corporate income tax as a non-resident taxpayer. This may result in a refund of any corporate income tax already paid, but only insofar the tax years are still outstanding, or an appeal was timely filed.

The Dutch legislator has already adopted new Dutch entity tax classification rules that will come into force as from 1 January 2025 (see also below). As part of these changes, the non-resident fund for joint account and comparable foreign legal forms will be included on the exhaustive list of non-resident taxpayers. Therefore, as from 2025, such comparable foreign legal forms directly owning Dutch real estate will again become subject to Dutch corporate income tax on income from directly owned Dutch real estate, as they will be treated as an ordinary corporate taxpayer.

New Dutch REIT regime?

As from 1 January 2025, a Dutch REIT (fiscale beleggingsinstelling)[10] can no longer directly invest in Dutch real estate. This change of law was adopted by the previous Dutch Government during 2023[11] and de facto means that the Netherlands will no longer facilitate collective indirect investment in Dutch real estate via an effectively tax-exempt vehicle (subject to zero per cent corporate income tax).

Various stakeholders have voiced concerns on the ability of the Netherlands to continue to attract (foreign) investments in Dutch real estate in the absence of a special tax regime. In a recent letter,[12] the Dutch State Secretary of Finance has acknowledged this sentiment. Based on an investigation into the advantages and disadvantages of having a REIT regime, the Dutch State Secretary of Finance indicated that a REIT regime would have a positive effect on (foreign) investments in Dutch real estate. It is now up to the new Dutch Government to decide if and in what form such a new Dutch REIT regime will be implemented.

Dutch tax classification rules for domestic and foreign entities

Based on the current Dutch tax classification rules, both domestic and foreign limited partnerships almost always classify as non-transparent from a Dutch tax perspective, due to the so-called ‘unanimous consent requirement’[13] not being included in the partnership documentation. As such, the current Dutch tax classification rules in practice frequently cause entity classification mismatches, which in turn may give rise to adverse tax consequences.

As from 2025, new Dutch tax classification rules will come into force.[14] Domestic limited partnerships (a Dutch commanditaire vennootschap) will become transparent from a Dutch tax perspective by default. In addition, the Dutch fund for joint account will also become transparent by default, with the exception of regulated ‘AIFs’.[15] A ‘similarity approach’ will be applied to comparable foreign legal forms. Non-comparable legal forms tax resident in the Netherlands will become non-transparent under the ‘fixed approach’, and foreign non-comparable legal forms will be treated symmetrical to their jurisdiction of residence under the ‘symmetrical approach’. Consequently, under the new classification rules most current entity classification mismatches should be mitigated.

Investments in Dutch real estate, for various reasons including for real estate transfer tax (RETT), pooling or carried structuring purposes, frequently utilise (foreign) limited partnerships in the investment holding structure. As referenced above, these (foreign) limited partnerships currently almost always qualify as non-transparent from a Dutch tax perspective. With the new Dutch tax classification rules coming into force, fund managers and investors should carefully consider whether an entity or legal form losing its non- transparent status from a Dutch tax perspective may give rise to adverse tax consequences.[16]

RETT/VAT developments

Transfer of newly built leased property by developer not subject to VAT

If an entrepreneur transfers a business whereby the business is continued after the transfer, for VAT purposes there is a ‘transfer of a going concern’ that is not subject to VAT. Leased real estate can also qualify as a going concern. For the purposes of calculating the VAT due, the buyer is deemed to have replaced the seller with respect to the transferred property. Transactions involving leased property between investors are therefore normally outside the scope of VAT.

In the case of the transfer of newly built real estate that is leased out by a developer to an investor, however, it is less clear whether there is a transfer of a going concern. Two cases are pending with the Dutch Supreme Court on the question whether such a transfer qualified as the transfer of a going concern. The Advocate-General recently issued its opinion on these cases to the Supreme Court.[17]

Both cases involved the transfer of a newly built residential complex that was leased out by a property developer. At the time of delivery, the residential complexes had been let for 3.5 months (complex one) and two weeks (complex two), respectively. The leases were continued by the buyers. With respect to the transfer, the property developers took the position that the transfer fell outside the scope of VAT because the properties together with the leases were a going concern. However, the tax inspector took the position that there was no going concern because the developers had developed the property with a view to selling (and not leasing) it, thus constituting a sale of stock. The buyers in question could not deduct any VAT owed because the properties were rented out exempt from VAT.

The Advocate-General applies an objective approach and considers that at the time of the sale, the property developer’s VAT business consisted of renting out residential properties. The transfer of the residential properties therefore should qualify as a transfer of a going concern. The project developer’s intention to sell the complex is not considered relevant by the Advocate-General, because this does not follow from the case law of the European Court of Justice.

The opinion of the Advocate-General is in line with the preceding verdicts of the Court of Appeals. These verdicts came as a surprise, because the same court ruled in 2018 that the delivery of a new office building by a developer did not qualify as a going concern, even though the developer had rented out the property for two weeks prior to the delivery. At the time, the Court of Appeals did consider the developer’s intention to sell the property (after its development) to be relevant, and therefore ruled that there was a sale of stock of goods taxed with VAT. Moreover, this judgment of the Court of Appeals from 2018 was upheld by the Dutch Supreme Court. If the Supreme Court follows the opinion of the Advocate-General the transfer of newly developed real estate that is leased can take place without the levy of VAT. In addition, based on a decree from the State Secretary of Finance also a real estate transfer tax exemption applies in such cases. However, the big question is whether the Supreme Court will uphold the verdicts of the Court of Appeals.

Dutch Senate advocates lower RETT rate for investors

The Dutch Senate (Eerste Kamer) has passed a motion calling for a reduced real estate transfer tax (RETT) rate for real estate investors. By lowering the RETT rate, the Senate aims to boost investment in residential properties.

When purchasing real estate, RETT is typically applicable. For owner-occupiers of residential real estate, the standard RETT rate is two per cent. In addition, there is a one-time exemption for RETT for buyers aged 18 to 35 purchasing a home valued up to €510,000 (as of 2024). For real estate investors, the RETT rate is currently 10.4 per cent. According to the motion, this high rate for investors has hindered investments in residential properties. The Senate urges further examination of how to substantially reduce this rate, thereby providing an additional incentive for investing in residential properties. If approved, the reduced RETT rate could take effect as early as 2025. The motion received the support of the former Minister of the Interior and Kingdom Relations, who has since been succeeded as the new Dutch Government took office. The Minister was thinking of a reduction to eight per cent or even six per cent. The question, however, is how this can be financed. According to the Minister, this cannot be done without increasing the rate for owner-occupiers.

Cancellation of the RETT concurrence exemption for certain share deals

As from 1 January 2025, the RETT exemption for newly built real estate will no longer apply to share transactions with respect to real estate companies that own building land and newly constructed real estate used (in part) for VAT exempt purposes. For envisaged share transactions affected by this measure, it is advisable that such share transactions take place before 1 January 2025. Currently, newly constructed properties can be acquired without VAT or RETT, if the shares in the real estate company are acquired. The Government wants to resolve the difference in taxation between asset deals and share deals by levying RETT on certain share transactions. To this end, the Government will abolish the RETT exemption for share transactions of real estate companies that own building land and newly constructed real estate, where more than ten per cent is used for VAT-exempt purposes.

To avoid overkill, a new RETT rate of four per cent is to be introduced for the acquisition of shares in real estate companies that can no longer benefit from the RETT exemption. The RETT exemption will not be abolished for share transactions in companies holding new real estate used for activities where at least 90 per cent of the VAT is recoverable in the two years following the acquisition. Therefore, in most cases, share transactions involving newly constructed logistics, office and retail properties should still qualify for the RETT exemption.

Transitional rules apply for ongoing development projects. This means that a purchaser is eligible for the RETT exemption (1) if a letter of intent was signed with the intended purchaser before 19 September 2023 at 1515; and (2) provided that the acquisition of the shares takes place no later than 1 January 2030. To apply the transitional rules, purchasers must have filed a notification with the Dutch tax authorities between 1 January 2024 and 31 March 2024.

Conclusion

The Dutch real estate market has seen various relevant tax developments in Dutch case law and adopted changes in applicable law in the recent period. Under the new Dutch Government, there, however, seems to be an increased focus on the investment climate and the Netherlands’ ability to continue to attract (foreign) investments into its real estate sector. This should hopefully result in a new Dutch REIT regime and relaxation of the earnings stripping rules, with further clarification expected on Budget Day 2024.