2023 Spring Memorandum includes several policy proposals for tax measures relevant for the Dutch real estate market

Introduction

The Spring Memorandum includes the following policy proposals for tax measures that are relevant for real estate investments in the Netherlands:

1. Excluding the real estate transfer tax (“RETT”) concurrence exemption (samenloopvrijstelling) for share deals;
2. Abolishing the EUR 1 million threshold under the earnings stripping rules for certain Dutch real estate entities;
3. Amending of the RETT demerger exemption; and
4. Introducing a VAT revision period for (valuable) refurbishment services (kostbare verbouwingsdiensten).

We will further discuss these proposed tax measures in this blog post.

Excluding the RETT concurrence exemption for share deals

The Dutch government launched an online consultation on 27 February 2023 on a draft legislative proposal to exclude the application of the RETT concurrence exemption in case of the acquisition of a qualifying share interest in companies owning new constructed real estate. The draft legislative proposal aims to (i) combat situations in which the acquisition of real estate located in the Netherlands is structured through a share deal (instead of an asset deal) to achieve a VAT advantage and (ii) reduce the inequality in the playing field between an asset deal and share deal. The online consultation ended on 27 March 2023. We refer to our blog of 3 March 2023 for more information on the RETT concurrence exemption, the draft legislative proposal and its overkill.

It is announced in the Spring Memorandum that the Dutch government still wants to effectuate this draft legislative proposal, but following the reactions on the online consultation it will be amended together with transitional law. The Spring Memorandum does however not explicitly address if, and if so how, the overkill in the initial draft legislative proposal will be eliminated from the amended legislative proposal in case achieving a VAT advantage is not the reason for structuring the acquisition of real estate through a share deal.

The Spring Memorandum mentions that the amended legislative proposal will be included in the 2024 Tax Package including the 2024 Tax Plan (pakket Belastingplan 2024) that will be published on Tuesday 19 September 2023 (Dutch Budget Day). The amended legislative proposal is expected to enter into force as of 1 January 2024, but the Spring Memorandum mentions that a postponed effective date may be considered which can provide for an alternative to transitional law that sometimes proves complex in implementation.

Abolishing the EUR 1 million threshold under the Dutch earnings stripping rules for certain real estate entities

The Dutch earnings stripping rules limit the deductibility of ‘excess’ net interest costs attracted from related and unrelated parties by a Dutch taxpayer. Net interest costs are only deductible for Dutch corporate income tax purposes up to the highest of (i) 20% (2023) of the taxpayer's earnings before interest, tax, depreciation and amortization (“EBITDA”) or (ii) a threshold of EUR 1 million. As the threshold is applied per Dutch taxpayer it is noted in the Spring Memorandum that in practice real estate investors often spread their investments over different entities to be able to apply the EUR 1 million threshold multiple times. In the Spring Memorandum it is therefore proposed that as of 1 January 2025 the EUR 1 million threshold will no longer apply to real estate entities (vastgoed-BV’s) with real estate leased out (to third parties) and that these entities would be dependent on the 20% EBITDA threshold under the earnings stripping rules. The legislative proposal, including the exact details (e.g. what is considered a “real estate entity” for purposes of the earnings stripping rules) and potential transitional law, will most likely be included in the 2025 Tax Package including the 2025 Tax Plan (Pakket Belastingplan 2025) that will be published on 17 September 2024 (Dutch Budget Day).

Amending the RETT demerger exemption

Under the RETT demerger exemption, the acquisition of real estate located in the Netherlands in the context of a demerger may be exempt from RETT, provided certain conditions are met. 

In the Spring Memorandum it is mentioned that the RETT demerger exemption aims to ensure that RETT is not an obstacle when companies want to restructure. The Dutch government describes that the legislator did not intend for the RETT demerger exemption to be applied if a restructuring takes place only with the intention of selling the real estate to a third party without levying RETT. According to the Dutch government, this may be the case, for example, if company A is demerged in such a way that the real estate is acquired by company B, after which company A acquires the shares in company B. Under current law, company B may, in principle, apply the RETT demerger exemption. If company A then disposes of the shares in company B to a third party, that third party (indirectly through the acquired shares in company B) becomes the owner of the real estate without the acquisition in principle being subject to RETT[1], whereas RETT would have been due if the real estate was directly acquired by that third party.

To prevent abusive situations it is proposed to bring the conditions for the RETT demerger exemption more in line with the other existing RETT exemptions (such as the RETT merger exemption and the internal reorganization exemption). As a result, a demerger within a group will be subject to the conditions of the existing internal reorganization exemption. A demerger outside of a group will be subject to conditions similar to the existing business merger exemption whereby, in short, the RETT exemption will only apply in the context of a demerger when the entire business, or an independent part thereof, (and not only the real estate) is contributed in another company with a capital divided into shares. The Spring Memorandum does not contain any information when it is expected that this legislative proposal will be published and on the envisaged entry into force date. We expect that this will either be included the 2024 or 2025 Tax Package.

Introducing a VAT revision period for (valuable) refurbishment services

The Spring Memorandum mentions the situation that a real estate investor refurbishes an “old” building (i.e. a building that has been put into first use more than two years ago) destined for VAT exempt lease, whereby such refurbishment does not result in new constructed real estate (see our blog post of 8 November and 15 November when refurbishment works may result in new constructed real estate). VAT is charged on the refurbishment cost and in principle VAT on such costs would not be deductible if the refurnished building is destined for VAT exempt lease (e.g. leasing of housing). A real estate investor could however first lease out the refurbished building in such a way that it may be subject to VAT (e.g. short term lease as student housing) to deduct the input VAT on the refurbishments costs. Under current law, it would then be possible to switch to VAT exempt leasing after one year without any revision of the initially deducted input VAT on refurbishment costs. This is, because under current law there is no VAT revision period similar to a revision period that applies to new constructed real estate. In short, in respect of new constructed real estate a 10 years revision period applies during which the initially deducted VAT may need to be recaptured (i) at once if the actual use of the real estate changes in the first book year in which the real estate is put into first use (first recalculation moment) or at the end of the first book year (second recalculation moment) or (ii) for 10% in each book year during the remainder of the nine book years following the book year of first use, to the extent that deduction of input VAT is not possible at a later moment (e.g. the real estate is used for VAT exempt purposes, such as a VAT exempt lease or sale).

In the Spring Memorandum it is mentioned that the Dutch government is of the opinion that a deduction of input VAT on refurbishment cost in the situation mentioned above is not in line with the aim and purpose of the law. The Dutch government therefore announces that it is currently exploring to introduce a VAT revision period for (valuable) refurbishment services and possibly bring this into online consultation at a later moment, whereby the Dutch government will keep eye on the feasibility of the tax measure for the Dutch tax authorities and its impact on the real estate sector.

It is noted that the Dutch government already started an online consultation on 18 May 2017, for a draft legislative proposal to introduce a VAT revision period for (valuable) services, but that draft legislative proposal has been neither adopted nor withdrawn (see our previous blog; in Dutch only) and it may well be that this draft legislative proposal will be (partially) revived.   

The Spring Memorandum does not contain a timeline for this proposal. The implications of an introduction of a revision period for (valuable) refurbishment services would however be significant. Firstly, it will increase the administrative burden for taxpayers, as they will need to administer the (different) revision periods for “valuable refurbishment services” which necessitates an adjustment of the current VAT administration. Secondly, the real estate sector in particular will face new complications with certain transactions, such as the purchaser of leased out real estate that, as a result of a transfer of a business going concern (overdracht van een algemeenheid van goederen), takes over the VAT position of the seller with respect to leased out property. As a result of such tax measure, the purchaser may be faced with an obligation to repay the VAT initially deducted by the seller for 'valuable refurbishment services' on the leased property.

Final remarks

The measures described above may potentially have a significant impact on real estate investments in the Netherlands. It is noted that the announced tax measures are no legislative proposals yet. However, it is expected that these measures will be included in the 2024 Tax Packages (to be published on 19 September 2023) or the 2025 Tax Packages (to be published on 17 September 2024). We will provide an update when the legislative proposals are published. In the meantime, please do not hesitate to contact us if you have any questions or would like to discuss the potential implications of the tax measures proposed in the Spring Memorandum.

[1] It is noted that the acquisition of the shares in company B would however be subject to RETT if company B would qualify as a Dutch real estate entity for RETT purposes and the third party would acquire a qualifying shareholding in company B. See our blog post of 18 May 2022 when a company qualifies as “Dutch real estate entity” for RETT purposes.