Tax developments that are relevant for Dutch real estate market

In this comprehensive overview, we delve into the latest tax developments impacting the Dutch real estate market, highlighting key changes and their implications for investors, developers, and stakeholders. From the abolition of certain tax exemptions to new regulations on entity classification and VAT case law, these updates signify crucial shifts in the landscape of real estate transactions and investment strategies in the Netherlands.

Dutch real estate transfer tax on share deals

On 1 January 2025, the real estate transfer tax (RETT) exemption for acquisitions of shares in companies owning building land or newly built real estate will be abolished. The specific rate for these share deals will be 4% (instead of the headline rate of 10.4%). An exception applies if the real estate is used for activities allowing at least 90% VAT recovery in the two years following acquisition.

Abolishment of EUR 1 million threshold in EBITDA interest deduction limitation rule

Currently, interest deduction on the basis of this rule is limited to the highest of (i) 20% of the EBITDA or (ii) EUR 1 million per tax payer.

The new Dutch coalition will increase the first threshold to 25% of the (tax) EBITDA, likely per 1 January 2025. This will have a positive impact on interest deduction possibilities.
It was earlier already announced that the EUR 1 million threshold per tax payer in relation to real estate that is rented out (to third parties) will be abolished, also per 1 January 2025. This means that investors that rent out real estate can solely rely on the (increased) EBITDA threshold of 25%.

We recommend to verify the impact of these changes and (re)consider investment structures.

Abolishment of fiscal investment institution regime in relation to real estate

Under the fiscal investment institution regime (fiscale beleggingsinstelling; “FBI”), a 0% corporate income tax rate applies under strict conditions. Per 1 January 2025, it is under the FBI regime no longer allowed to invest in Dutch real estate directly. FBIs investing in Dutch real estate directly, will become subject to 25.8% corporate income tax. Indirect investments in Dutch real estate will continue to be allowed. Purpose of this change is to make sure that the Netherlands is allowed to levy taxation in relation to Dutch real estate.

This rule has significant impact on parties that currently apply the FBI regime in relation to direct real estate investments. Investment structures to be (re)considered.

Changes in entity classification rules

On 1 January 2025, the Dutch entity classification rules in relation to foreign entities will change. New draft guidance in relation to these rules has been published. It is expected that as a result of these rules, various foreign vehicles will change from non-transparent to transparent. In addition, non-transparent Dutch mutual funds (FGRs) and Dutch limited partnerships (CVs) will in principle become transparent on 1 January 2025, with a strict exception for regulated FGRs.

This in principle results in a deemed transfer of assets and liabilities by the foreign entity to its shareholders and may result in various tax consequences, such as levy of capital gain taxes or changes in withholding tax and interest deduction positions. See this link for more information.

We recommend to verify the impact of these new classification rules for entities and their shareholders as soon as possible.

Important case law about unrealized tax losses

According to recent case law, in case of a share deal unrealized losses (i.e., to the extent the fair market value of real estate is lower than the tax book value) will be forfeited in case of a share deal. The case goes to Supreme Court.

Until the Supreme Court decides, this results in uncertainty in relation to share deals, which may have significant impact on the purchase price negotiations and transaction documentation. We recommend to verify the potential impact and make sure that appropriate language is included in transaction documentation. See also this LinkedIn post.

Important VAT case law about the supply of building land with remaining buildings

The Supreme Court recently ruled on the qualification of land as building land. For VAT purposes the supply of building land is subject to VAT and consequently the acquisition is exempt from real estate transfer tax. In practice, with regard to residential development of a plot, the intention is generally a supply that is not subject to VAT due to non-recoverable input VAT.

An important condition to qualify land as building land is that the relevant land is undeveloped. In the case on which the Supreme Court rules, on the supplied plot a long wall remained that was left after demolition of the rest of the building that formerly served as candy factory. After the supply of the land, houses were built on the plot. The wall serves as outside wall of the later constructed garages and as partition wall for the adjoining plots.

The Supreme Court rules the opposite of what was ruled before the lower court and on appeal. According to its judgment the land qualified as undeveloped, while before it was ruled that the plot was developed due to the remaining wall.
The Supreme Court observes that the wall indeed qualifies as a building. However, because the supplied plot exists of both a building and undeveloped land, it should be assessed whether the plot, as a whole, must be regarded as a building and its land linked to the building. The latter is not the case. The Supreme Court notes that the remaining wall is negligible in relation to the undeveloped part of the plot. Therefore, the plot should be regarded as undeveloped land.

It was certain that the undeveloped land was intended to be developed at the time of the supply of the plot. Therefore, the supply qualifies as supply of building land and is subject to VAT.

In our opinion, this case emphasises the complexity to determine whether a supply of land constitutes the supply of building land for VAT purposes. The answer to that question highly depends on the facts and circumstances. With respect to supplies of land with remaining buildings we recommend to perform an in-depth analysis.

Box 3 (in relation to savings and investments) rate will be lowered

Real estate owned by individuals is taxed in box 3, at 36%. Under the current regime, not the actual income but deemed income is taxed, which deemed income is a percentage of the value of the real estate. It has just been announced that the box 3 rate will be lowered per 1 January 2025. It is not clear to what extent the box 3 rate will be lowered.
It is furthermore expected that within a few years, not the deemed income will be taxed, but the actual income. The exact system in this respect is still subject to discussions and it may take a few years before this is implemented (expected per 1 January 2027).

Questions?

If you have any questions, please don’t hesitate to contact our colleagues Arthur Smeijer or Gerben Markink.