Dutch tax classification rules: proposed changes to funds for joint account
In spring 2021, the Dutch government proposed to overhaul the Dutch tax classification rules for Dutch and foreign entities, such as partnerships, with the aim to align these rules with international standards. See our newsletter of 30 March 2021. Following public debate and input from stakeholders around this topic, it has recently been announced that two separate bills of law to change the Dutch tax classification rules will be submitted during the 2023 Dutch Budget Day. On the one hand, a bill to change the general tax classification rules and on the other hand this separate, now being consulted, bill to change the Dutch tax classification rules for FGRs as these rules are closely connected to the tax investment regimes that are dealt with in this proposal.
An FGR can be qualified tax transparent or tax non-transparent. There are currently three types of FGRs, in short being: (i) an FGR in which participations are only transferable to other participants with unanimous consent (transparent), (ii) an FGR in which the participations can only be repurchased by the FGR or transferred to certain close-related family members (transparent) and (iii) an FGR with transferable participations (non-transparent).
Under the newly proposed rule, an FGR will only be non-transparent, provided that it is regulated following the Dutch financial supervision legislation and the participations in the FGR are tradeable. In case the participations in an FGR can solely be repurchased by the FGR, the participations are deemed to be not tradeable and thus such FGR will be qualified tax transparent even when it is regulated. In all other situations, the FGR will be qualified tax transparent including typical family-owned FGRs that currently qualify as non-transparent and potentially make use of the tax-exempt investment institution regime (vrijgestelde beleggingsinstelling or VBI).
Subject to certain strict conditions, certain investment entities can apply the VBI-regime which results in a tax-exempt position for corporation tax and dividend tax. In line with the proposed changes to the FGR classification rules, it is proposed to amend the VBI-regime in such a way that only entities regulated following the Dutch financial supervision legislation can apply for the VBI-status. Generally, this means that the VBI-regime will no longer be available to family-owned investment vehicles.
In practice, these sudden changes to the entity classification will result in a tax realization moment at entity level and at participant level without cash having actually been generated. Therefore, several alleviating facilities are being proposed: (i) a rollover facility, (ii) a share-for-share merger facility (including a real estate transfer tax (RETT) exemption), and/or (iii) a deferred payment obligation (spread out over ten years).
As this newly proposed rule – which is envisaged to enter into force as of 1 January 2024 – could result in a change in the tax classification of an FGR, one should carefully check the (potential) tax consequences for existing structures.
Proposed changes to the Dutch FBI regime
On 20 September 2022, the Dutch government announced its intention to disallow an entity applying FBI status to directly invest in real estate (i.e., the Dutch REIT-regime). The initial date of entry into force,1 January 2024, was later postponed to 1 January 2025. On 8 March 2023, the draft bill of law was published for consultation, providing more details on the proposed measures, including the alleviating measures in relation to RETT.
According to the draft bill of law, an entity applying the FBI regime is no longer allowed to invest directly in real estate, irrespective of where the real estate is located. The same applies to situations where an FBI invests in real estate through a partnership (either Dutch or foreign) that is transparent for Dutch tax purposes. The activities of an FBI should remain restricted to holding passive portfolio investments, which may be owned through taxable subsidiaries. Therefore, indirect investments in real estate through a regularly taxable company will still be allowed. The FBI cannot be involved in the management of its taxable subsidiaries.
Real estate development is in principle not seen as a “passive” portfolio investment. However, to accommodate real estate developments for the FBI’s own portfolio, an FBI is currently allowed to hold and manage a regularly taxed subsidiary company engaged in real estate development for the benefit of the FBI or related entities. Under the proposed new rules, such development company is still allowed, but may no longer develop real estate for the benefit of the FBI, only for itself or related entities that are regularly subject to tax. A similar provision is introduced for (regularly taxed) subsidiaries which are engaged in ancillary services. The FBI is not allowed to be involved in the managements of these entities.
In addition, the current 60% financing limit for (indirect) real estate investments will be abolished. This effectively means that if the FBI regime is retained, the reduced general financing limit will apply, i.e., a maximum of 20% debt financing.
Due to the proposed amendments to Dutch tax classification rules for Dutch FGRs, as discussed above FGRs currently applying the FBI status may be affected too. As a background, the FBI regime is open to Dutch private and public limited liability companies (BVs and NVs), Dutch non-transparent FGRs and foreign equivalent legal forms. The FGR is proposed to be classified as non-transparent only if it is regulated following the Dutch financial supervision legislation and the participations in the FGR are publicly traded.
The proposed measures include a temporary RETT exemption for the acquisition of beneficial ownership of real estate resulting from the restructuring of an FBI into a tax-transparent vehicle such as an FGR. The acquisition of FGR participations is a RETT taxable event as this concerns the acquisition of beneficial ownership of real estate. Transfers of legal ownership of real estate as a result of the Real estate measure may still result in the levy of RETT. The proposal contains no exemption for such transfers. In the temporary restructuring exemption as included in the proposal the FBI remains the legal owner of the real estate as a custodian after conversion of the FBI into a foundation. The RETT exemption will only apply to transfers of participations in tax-transparent vehicles by legal persons qualifying as an FBI under the current rules and therefore not to transfers by investments vehicles that are already structured as an FGR. The RETT exemption will apply temporarily between 1 January 2024 and 31 December 2024. The amendments to the FGR definition and the alleviating RETT measures for the amendments to the FBI regime are proposed to enter into force on 1 January 2024. The amendments to the FBI regime itself are proposed to take effect on 1 January 2025 and apply first in respect of book years commencing on or after 1 January 2025. However, as the changes to the FGR classification rules already apply as of 2024, this may affect FGRs with FBI status even before the amendments to the FBI regime will take effect.
The proposed amendments to the FGR and FBI may have major consequences to existing investment structures. Loyens & Loeff can assist you with performing an impact assessment. With those conclusions in mind restructuring alternatives should be investigated and already explored with the principal stakeholders.