Increasing trend of real estate share deals and the crucial role of the civil law notary
Transactions in the real estate industry are becoming more and more complex, an example being indirect real estate transactions: a challenging field of law in which the role of the civil law notary is ever so important.
Indirect Real Estate transactions
A clear trend in Dutch real estate transactions is the increasing number of transactions that are structured as a share deal (“indirect real estate transactions”).
The choice for a share deal (instead of an asset deal) is often made for reasons of tax optimization, which generally benefit the seller and the buyer. Most share deals are driven by (significant) savings in corporate income tax, which savings are typically commercially shared between the seller and the buyer. Upon a share deal, if certain conditions are met, no Dutch corporate income tax is due for the seller on the difference between the tax book value and the fair market value of the real estate (being the purchase price in case of an asset deal). The tax claim is deferred to a later date when the real estate is sold. As the buyer acquired an entity with a latent tax claim, the buyer will generally ask for a discount on the shares price. The discount is an outcome of negotiations between parties, although a 50/50 split is often agreed upon in the market.
In certain situations an indirect real estate transaction can also result in a saving of real estate transfer tax (eg, in the case of multiple unaffiliated purchasers, that each acquires less than a third of the shares) or a reduction of the overall amount of non-deductible VAT (eg, in the case of newbuild residential real estate). The real estate transfer tax savings or VAT savings can in some cases even cumulate with the corporate income tax advantage.
Role of the civil law notary
Both in direct and indirect real estate transactions governed by Dutch law, the civil law notary plays a central role.
When a direct (or ‘brick and mortar’) real estate transaction is entered into, the civil law notary involved plays a clearly regulated role: he or she will ensure that legal title to the real estate is transferred to the purchaser free from any mortgages or attachments. The civil law notary will do so by – among other things – performing searches in the Dutch Land Registry at three different moments: (1) when taking on the assignment, (2) shortly before the execution of the transfer deed, and (3) on the first business day after filing of the transfer deed with the Dutch Land Registry. The civil law notary will only pay the purchase price to the seller after having established (after this final search) that the seller has fulfilled its obligation to transfer a ‘clean’ legal title of the real estate to the purchaser. This is generally considered a clear and well-functioning system enabling real estate transactions to be smoothly completed with (practically) no title risk for the purchaser.
Also, in case of an indirect real estate transaction governed by Dutch law, a civil law notary would usually get involved since the transfer of legal title in Dutch companies would require a notarial transfer deed. The civil law notary will perform certain checks to ensure that legal title to the shares is transferred (free from pledges and attachments) to the purchaser. This is in a way similar to the system set out above with respect to real estate in a direct real estate transaction.
However, in case of an indirect real estate transaction, the civil law notary’s role with respect to the real estate itself is less obvious. There is no specific rule of law or professional rule prescribing the civil law notary’s duties in this respect. As a consequence, it is for example unclear whether the civil law notary should perform checks in the Dutch Land Registry and how to act if any irregularities appear. Other aspects of the civil law notary’s role that are less clear when dealing with an indirect real estate transaction relate to the moment the purchase price is released to the seller, the potential applicability of preferential rights of government bodies and (advice on) real estate transfer tax that might be due.
Parties that wish such uncertainty to be taken away and potential risks to be minimized, should consider seeking specialized legal advice. When dealing with indirect real estate transactions, a clear arrangement between parties and the civil law notary with respect to latter’s role seems ever so important.
For obtaining his Master of Real Estate title our colleague Ralph van der Kooi wrote a thesis on the role of the notary in indirect real estate transactions, the subject matter of this blog. The full text of his thesis (reading in Dutch) is publicly available can be found here.
What we can do for you
Transactions in the real estate industry are becoming more and more complex, resulting in a growing need for integrated legal, tax and notary services. An example being indirect real estate transactions, a challenging field of law in which we have played a leading role over the past years, combining our integrated legal and tax advise. We advise real estate investors on all legal and tax issues when pursuing indirect real estate transactions.
For more information on this subject and the specific possibilities for a transaction you might envisage, please feel free to reach out to us.