What proposed changes will affect real estate entities?
The Dutch tax rules in relation to the real estate market are changing rapidly. In 2024, new rules have been proposed and a new VAT-decree entered into force. This will impact real estate entities and landlords.
REIT regime axed from 2025
The Dutch law to abolish the real estate investment trust (REIT) regime has been adopted and will enter into force on 1 January 2025. This means that Dutch real estate funds (and other Dutch REITs) can no longer benefit from the 0% corporate income tax rate. Proposed legislation to amend the Dutch investment regime went to consultation last May, opening restructuring options for current REITs.
EBITDA changes
Currently, the Dutch earnings before interest, taxes, depreciation and amortisation (EBITDA) rule limits the deductibility of net interest costs for Dutch corporate income tax purposes to the highest of 20% of the EBITDA of a taxpayer and of €1million. This means that, in practice, every taxpayer can deduct at least €1million of net interest costs during a year.
As announced last year, it is proposed that from 1 January 2025 the €1 million threshold will no longer apply to entities with real estate leased out to third parties. Accordingly, interest deduction for these entities would thus be limited to the 20% EBITDA threshold.
On 15 May 2024, the new coalition published their general coalition agreement in which they announced to increase EBITDA threshold from 20% to 25%. According to the new coalition this corresponds to the EU average.
The legislative proposal for both proposed changes is expected to be included in the 2025 Tax Plan (Belastingplan 2025) that will be published on Dutch Budget Day 2024 on 17 September 2024.
RETT demerger exemption
Under the current real estate transfer tax (RETT) demerger exemption, a demerger of real estate is exempt from RETT (and corporate income tax), unless the demerger is predominantly aimed at the avoidance or deferral of tax. This anti-avoidance tax measure will be exchanged for objective requirements as the current rule leads to a wider application of the RETT demerger exemption than was intended.
On April 8, a proposal to change the RETT demerger exemption went into consultation. Under the new scheme only two types of demergers are facilitated for RETT purposes (the facility for corporate income tax remains the same): a business demerger, where real estate as part of a business is split off, and a dispute demerger of real estate following a dispute between the shareholders.
The consultation proposal does not mention an effective date.
Business demerger
Three requirements have to be met in order to qualify for the business demerger .
A business requirement means that a business, or an independent part of a business, must be acquired from the perspective of the acquirer. A business has been defined in case law as a sustainable organisation of capital and labour that through participation in economic transactions has the (subjective) intention to obtain profits with the (objective) expectation that such profits can reasonably be achieved.
Real estate that does not form part of a business cannot benefit from the business demerger, irrespective whether a business will be transferred as part of the same demerger.
A continuation requirement means that the business must be continued in its entirety by the acquirer for at least 3 years subject to certain specific post demerger restructurings.
A retention requirement means that the demerging entity (or the shareholders of the demerging entity) must hold for at least three years a similar interest in the acquiring entity or real estate. With similar interest the proposal means an interest that is equivalent in both qualitative and quantitative terms to the interest that has been split off by the (shareholders in the) demerging entity. So a subsequent dilution of the interest in the real estate would violate this requirement. Also here, certain specific post demerger restructurings are allowed.
Dispute demerger
In short, a dispute demerger is allowed if the shareholders retain a similar interest in the real estate of the demerging entity. Any increase of interest is subject to RETT.
VAT revision period for services to real estate
In the spring memorandum 2023, it was announced that the Dutch government was exploring the introduction of a newly proposed value added tax (VAT) revision period for services to real estate.
In the legislative proposal a threshold is included for services with an invoice amount of at least EUR 30,000. Consequently, only services to real estate with an invoice amount of at least EUR 30,000 will be subject to a VAT revision period of 5 years meaning that the real estate has to be used for VAT taxed purposes in order to fully recover the input VAT due on the services. The threshold applies per service (and not per invoice).
A transition period is proposed with an entry into force as per 1 January 2026. This means that VAT revision periods will apply on the aforementioned services to real estate that will be put into use after this date.
New VAT decree for real estate affecting landlords
As per 1 January 2024 the new VAT decree issued by the state secretary for finance came into effect. The decree updates the old VAT decree of 2013 and provides for some interesting positions on the VAT treatment of various real estate related topics, in particular for project developers and landlords.
VAT on service costs
One of the main adjustments is the change in the VAT treatment of service costs when leasing-out residential property to private individuals. Previously, service costs were considered to be part of the lease, so VAT exempt. In the decree, the service costs are rather considered a separate service for VAT purposes, so that the service costs are subject to VAT. A consequence of this is that landlords of residential properties are more likely to be liable for VAT.
Opting for VAT taxed lease – formal requirements
When a landlord and tenant opt for VAT-taxed lease, certain formal conditions must be included in the lease agreement. If one or more of these conditions are not (completely) included, the lease is in principle VAT exempt.
The decree approves that the lease will still be subject to VAT if not all formal conditions have been met, and the parties did act as if they had validly opted for a VAT-taxed lease. In that regard it is of importance that the tenant has actually used the leased property for services for which at least 90% of the right to deduction exists, and the landlord and the tenant have acted as if the choice for VAT-taxed leasing was valid. The latter may be evidenced by the fact that the landlord has actually charged VAT and that the parties accept the consequences that laws and regulations attach to the option for VAT-taxed lease. The formal defect should, however, be remedied within a reasonable time after discovery. In our opinion, this is a very welcome approval for the practice.
First use of a building
The transfer of real estate is, by operation of law, VAT taxed if it takes place before on or at the latest two years after the time the real estate was first put into use (the two-year period). The decree now stipulates that the first use also involves the moment the tenant performs certain fit-out and actual acts are performed in the premises with a view to permanent use in accordance with the objective destination.
Osborne Clarke
These developments could have a significant impact on existing RE funds and RE development and renovation projects – and particularly in relation to residential RE projects.
The Osborne Clarke tax team is happy to assess the impact of the proposed rules on existing RE funds and RE development and renovation projects and the scope for potential restructuring alternatives.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.