Asset deals and share deals
Different than in Belgium, real estate transactions in the Netherlands are often structured as asset deals. The acquisition of a Dutch real estate asset is subject to 6% real estate transfer tax (RETT) (2% for residential real estate). No VAT is due upon acquisition of a real estate asset, unless the parties opt for a transfer with VAT or the property qualifies as “new property” (in which case an exemption of RETT should apply). The (rental) income generated by the entity holding the property is taxed with corporate income tax (CIT) against a rate of 20-25%The first EUR 200,000 is subject to 20% CIT, the exceeding amount is subject to 25% CIT which can be set off against (interest) expenses and depreciation (to which certain limitations may apply). As from 2019 up to and including 2021, the Dutch CIT rate will in annual steps be lowered from 20%-25% to 16%-21%.
The acquisition of Dutch real estate may also be structured as a share deal. Just as the direct acquisition of a real estate asset, the acquisition of shares in an entity holding largely real estate (and at least 30% Dutch real estate) is subject to 6% RETT (2% for residential real estate), unless less than 1/3 of the shares will be acquired. However, the acquisition of shares in a real estate entity is in principle exempt from RETT if the real estate asset qualifies as “new property” and would have been subject to VAT in case of an asset deal. The acquisition of shares in a real estate entity is not subject to VAT. As in Belgium, upon acquisition of the shares in a company, a potential deferred CIT liability (or deferred CIT asset) might need to be taken into account (reflecting the difference between the value in the commercial accounts and the tax book value). As set out above, the income generated by the Dutch entity is taxed against 20-25% CIT.
Dividend withholding tax
Profit distributions by Dutch entities are in principle subject to 15% Dutch dividend withholding tax (DWT). As from 1 January 2018, an exemption applies for distributions to EU companies and tax treaty resident entities with a shareholding of at least 5%, but the exemption is subject to an antiabuse rule. The exemption does not apply if the structure is considered to be set up with (one of) the main purpose(s) to avoid DWT (Main Purpose Test) and the structure is considered artificial (Artificiality Test). The main purpose is in principle deemed to be the avoidance of DWT if the DWT position in the actual structure is better than in the situation that the ultimate beneficial owners would have held the interest in the Dutch entity directly. If valid business reasons are reflected in the structure, it cannot be considered artificial. This would for example be the case if the direct or indirect 100% shareholder of the Dutch entity carries on an active business enterprise (e.g. as top holding entity) and an active business enterprise is carried on below in the structure. If the active business above the Dutch entity is carried on by an indirect shareholder in a country with which the Netherlands has not concluded a tax treaty, the direct shareholder of the Dutch entity should meet at least certain substance requirements (including EUR 100,000 salary expenses and having an own office). In the view of the Dutch tax authorities, ‘hold and lease’ real estate should not be regarded as carrying out an active business, whereas developing real estate generally is considered sufficiently active. Although we believe that there may be good arguments to take a different position, hold and lease investments may be subject to discussions with the tax authorities about the DWT exemption. If the conditions for the DWT exemption are met, this exemption should be actively claimed by the distributing entity, i.e. the Dutch entity should explicitly confirm that all conditions for the exemption are met within a month after the profit distribution.
The intention of the Dutch government is to abolish the DWT altogether per 1 January 2020. On the other hand, the Dutch government announced that it wants to introduce a new withholding tax on distributions to low-taxed jurisdictions and in abusive situations. There is no further guidance on this yet.
The Netherlands signed up for the multilateral instrument (MLI). As a result of the MLI, various amendments will be included in existing bilateral tax treaties automatically if the other relevant country signed up for the same amendments. Note however that, as far as it concerns Belgian investors, the Belgium-Netherlands tax treaty is not targeted by the MLI, since neither States wish this treaty being covered by the MLI. One of the measures adopted by the Netherlands is the implementation of a principal purpose test (PPT) in treaties. As a result, treaty benefits, such as a decrease of the DWT rate, will not be granted if the principal purpose of an arrangement is obtaining a treaty benefit. The Netherlands may explain the PPT in tax treaties along the lines of the Main Purpose Test in domestic tax legislation (see above). When the MLI becomes effective depends on the ratification process in the Netherlands and the other country involved (entry into force per 2019 at the earliest).
General interest deduction limitation rule (EBITDA rule)
Further to an EU initiative, a general interest deduction limitation rule will be implemented as per 1 January 2019. As a result of this, deduction of ‘exceeding interest’ (i.e. interest expenses minus interest income) will be limited to the highest of (i) 30% of the EBITD (earnings before interest taxation and depreciation) or (ii) EUR 1 million. The final legislative proposal is expected to be released within the next few months.
Dutch REIT regime
A Dutch REIT (fiscale beleggingsinstelling) is subject to CIT at a rate of 0%. A Dutch REIT is obliged to annually make profit distributions. These profit distributions are in principle subject to 15% DWT The DWT rate may be reduced under prevailing tax treaties . A REIT is subject to certain requirements, such as debt levels, governance requirements and shareholder requirements.
In October 2017, the Dutch government announced that it intends to abolish the Dutch REIT regime per 2020 for direct investments in Dutch real estate. Reason for this is that, with the intended abolishment of the DWT, Dutch REITs would not be subject to Dutch CIT or DWT at all. Various interested parties are currently raising objections against the announcement to abolish the REIT regime and propose alternative regimes.
Future real estate structures
As a result of the changes in Dutch tax law, especially the introduction of an anti-abuse rule in the DWT act, certain adjustments may need to be made to the typical Dutch real estate investment structures. For example, the following options could be considered:
- Increase the substance in the entity that holds the shares in the Dutch entity;
- Invest directly in Dutch real estate through a non-Dutch entity;
- Hold the Dutch real estate in a Dutch cooperative.
General civil law aspects
Belgian civil law and Dutch civil law with respect to real estate are similar on certain subjects but there are also differences between the two systems. In this newsletter we would like to highlight some specifics of the Dutch right of leasehold, which differs from the Belgian right of leasehold, and to address the various types of Dutch leases and the standard model for contractual leases that is frequently used in the Netherlands.
Right of leasehold
Under Dutch law, a right of leasehold is the right to hold and (exclusively) use the real estate owned by another party. The leaseholder does not legally own the buildings and works it constructs in or on the land. The owner of the land is the legal owner of any such building as a result of the Dutch legal principle of vertical accession (verticale natrekking). The bare owner in the Netherlands is usually a local government authority. Such authority retains ownership of the property so that it can control the purposes for which the property is used by imposing certain standard leasehold conditions on the leaseholder. Such leasehold conditions are included in the deed of issuance of leasehold and certain rules are included in the Dutch Civil Code and can for example state quite specifically which kind of use of the land is allowed. As another matter of control, the leasehold conditions can also stipulate that consent of the bare owner is required in case of transfer or encumbrance. A leaseholder is usually required to pay a periodic remuneration called the ground rent (erfpachtcanon), which may also be paid in advance for a specific period or in perpetuity. Finally, the tax treatment of the transfer of a leasehold right is the same as for transfer of a freehold assed, RETT upon transfer is calculated as 6% over the value of the property as if it is held in freehold. The fact that a right of leasehold in Belgium and the Netherlands is so different is interesting given that various other rights in rem under Belgian and Dutch law are structured similarly.
Dutch types of contractual leases and ROZ model
As in Belgium, Dutch law knows three different types of contractual leases, being office leases, retail leases and residential leases. The office lease regime is the most flexible regime with only very few statutory provisions that apply. The retail leases are less flexible than office and know semi-mandatory statutory provisions on specific subjects that do not allow deviations detrimental to the tenant. Finally, the residential leases are least flexible with mandatory or semi-mandatory statutory provisions on a lot of subjects, residential tenants being very well protected under Dutch law. Many Dutch leases (office, retail and residential) are based on a standard model of the Dutch Council for Real Estate (Raad voor Onroerende Zaken or ROZ), which consists of a standard form of contract with a set of standard conditions. Different models exist for office, retail and residential leases and for each lease type the model is updated every few years.
The ROZ model addresses the main rights and obligations of both the landlord and the tenant, although the standard conditions do tend to favor the landlord. The ROZ standard conditions deviate from (non-mandatory) statutory provisions for the benefit of the landlord on several points. The ROZ model is a practical tool since all parties involved in real estate in the Netherlands are familiar with this model and it has been accepted as market standard, it can therefore also ease negotiations on certain topics. Nonetheless, it is not uncommon to agree on tailor made amendments from the ROZ standard conditions or to enter into tailor made agreements which are not based on the ROZ model.