Self-storage business qualifies as real estate entity for Dutch real estate transfer tax purposes

The self-storage business therefore meets the purpose requirement (doeleis) and, as it also meets the ownership requirement (beziteis), qualifies as a real estate entity for Dutch real estate transfer tax (“RETT”) purposes (onroerendezaakrechtspersoon). Consequently, the acquirer of all shares in the self-storage business has to pay 6% Dutch RETT (2015 rate) on the fair market value of the immovable property situated in the Netherlands directly or indirectly represented by those shares.

In this blog post Johan Vrolijk describes when an entity qualifies as a real estate entity for Dutch RETT purposes and also elaborates on the Amsterdam Court of Appeal’s decision, including the course of the proceedings.

Dutch Real Estate Entity

(a) General

An entity qualifies as a Dutch real estate entity if it meets the following cumulative conditions:

1. It concerns an entity incorporated under Dutch or foreign law with a capital divided into shares (or certain cooperative associations); and
2. The assets of that entity at the moment of acquisition or at any moment in the 12 months preceding the acquisition - on a consolidated basis - consist for more than 50% of  immovable property and at the same for at least 30% of immovable property situated in the Netherlands (ownership requirement; bezitseis); and
3. The immovable property, taken as a whole, at the moment of acquisition or at any moment in the 12 months preceding the acquisition - on a consolidated basis - is, or was, instrumental (dienstbaar aan) for at least 70% to the acquisition, disposal or exploitation (e.g. leasing) of such immovable property (purpose requirement; doeleis). 

For the application of the ownership requirement and purpose requirement, “immovable property” also includes shares in a Dutch real estate entity (fictitious immovable property), rights to which the (fictitious) immovable property is subject (e.g. right of superficies or right of leasehold), as well as the beneficial ownership (economische eigendom) of such (fictitious) immovable property or rights.

(b) Purpose requirement

In practice, the assessment as to whether an entity qualifies as a Dutch real estate entity often resolves around whether an entity meets the purpose requirement (condition 3. above). The statutory objectives of the entity are not decisive in this respect. The purpose requirement is primarily assessed based on the actual activities carried out by the entity and therefore depends on the relevant facts and circumstances.

It follows from the parliamentary history and case law that the purpose requirement contains a quantitative element (at least 70% of the immovable property should be traded in and/or exploited as such) and a qualitative element (the business model of the entity should be objectively viewed to determine whether it (mainly) consists of trading in and/or exploitation of immovable property or other activities instead).

If the entity also carries out other activities, it should be established whether the immovable property, taken as a whole, for at least 70% of the total value of these immovable properties, is instrumental to the trading in and/or exploitation of these immovable properties. If the immovable property is for more than 30% instrumental to other purposes than trading in and/or exploitation of immovable property, the purpose requirement is not met and that entity does not qualify as a Dutch real estate entity. For example, if the assets of an entity consist for more than 50% of a building located in the Netherlands in which a business is conducted that is not aimed at the trading in and/or exploitation of immovable property (e.g. the sale of consumer items or the production of cars), such entity will not qualify as a Dutch real estate entity.

In certain situations there may, however, be doubt as to whether the respective entity meets the purpose requirement. This concerns situations in which it is inherent to the nature of the entity’s own business process that an entity makes all or parts of the immovable property available to third parties. For example, in respect of a hotel business, a camping site and a datacenter, the exploitation of immovable property was not regarded a goal in itself, but merely a means of realizing its core activities (i.e. providing certain services). In those situations the provision of all or parts of the immovable property is subordinate to the totality of services provided to its customers. Whether the same holds true for other types of immovable property with a hybrid character, such as a self-storage business, storage tanks or independently operated warehouses that offer storage to online retailers - should be determined on a case-by-case basis depending on the relevant facts and circumstances.

In respect of a self-storage business, the Dutch Supreme Court ruled on April 16, 2021 that whether the provision of all or parts of immovable property is subordinate to the totality of services provided to customers should be assessed from the perspective of the customers. Business activities that are not aimed at individual customers (i.e. overhead expenses) are not relevant in this context. The Dutch Supreme Court referred this case to the Amsterdam Court of Appeal for factual investigation (see further below).

For completeness’ sake, it is mentioned that in respect of a hotel business, the Court of North-Holland decided last year that an entity that owns a hotel building, but has the hotel rooms and facilities operated by a third party, meets the purpose requirement and, as the ownership requirement is also met, qualifies as a Dutch real estate entity. Based on the actual activities, the Court of North-Holland held that the characteristic business process of that entity is not operating a hotel. Although the entity’s business process exhibits characteristics of interference with the hotel, this interference is limited and subordinated to the predominant activities performed by that entity as an investor in the hotel. The acquirer of that entity appealed against that decision to the Amsterdam Court of Appeal. The decision of the Amsterdam Court of Appeal is expected later this year.

(c) Taxable acquisition of shares in a Dutch real estate entity

If an entity qualifies as a Dutch real estate entity (see under (a) above), Dutch RETT is only due if a qualifying interest in that Dutch real estate entity is acquired or expanded (interest requirement; belangeis). A legal entity acquiring shares in a Dutch real estate entity only meets the interest requirement if upon its acquisition, including shares already owned, whether or not together with affiliated individuals or entities, holds an interest of at least 33 1/3% in the Dutch real estate entity.

In the case of a qualifying acquisition of shares in a Dutch real estate entity, Dutch RETT is in principle due on the fair market value of the immovable property directly or indirectly represented by those shares. However, it follows from Dutch case law that the acquisition of shares in a Dutch real estate entity is exempt from Dutch RETT, to the extent that otherwise Dutch RETT would be levied on the fair market value of immovable property on which no Dutch RETT would be levied upon direct acquisition of the immovable property.

Amsterdam Court of Appeal decision (self-storage business)

(a) Relevant facts

In short, on June 30, 2015 an international self-storage concern (BV X) acquired all shares in a Dutch holding company, which company held all shares in another Dutch company that in its turn wholly owned all shares in two Dutch companies that operated a competing self-storage business (BV Y), against a purchase price of approximately € 117 million. BV Y has 23 locations in the Netherlands offering self-storage facilities to customers against payment. 21 self-storage facilities were located in a building (indirectly) owned by BV Y and 2 self-storage facilities were located in a building leased from a third party. In addition to making self-storage facilities available, BV Y also provides associated (optional) services such as climate control of storage spaces, counseling and advising customers on suitable storage spaces, assisting in the storage and removal of materials in the storage spaces, selling packaging and/or storage materials and locks, taking out insurance policies for stored items, security and screening of customers, providing trolleys, and renting trailers. Furthermore, the business operations of BV Y and its wholly-owned Dutch subsidiaries also consist of developing and updating the business concept for all locations, including a marketing strategy, action plans, IT systems, a customer relationship management system and standard contracts, and actively managing each location to achieve profitable occupancy rates.

(b) In dispute

The dispute between BV X and the Dutch tax inspector concerns whether the immovable property indirectly acquired by BV X upon acquisition of all shares in BV Y is, or was, instrumental to the exploitation of immovable property (position of the Dutch tax inspector) or not (position of BV X). The Dutch tax inspector imposed an additional Dutch RETT assessment of approximately € 6.4 million (assuming a taxable base of approximately € 107 million) against which BV X filed an objection and, subsequently, appealed to the Court of The Hague.

(c) Course of the proceedings

The Court of The Hague held that BX Y was engaged in leasing parts of immovable property for storage purposes and its other services were subordinate to this, so that BY Y met the purpose requirement and, as the ownership requirement was also met, Dutch RETT was due by BV X upon the acquisition of all shares in BV Y (qualifying interest in a Dutch real estate entity. The Court of The Hague determined the taxable base in the proper administration of justice at € 85 million (instead of € 107 million) taking into account that the share purchase price less the book value of the leased buildings amounted to € 102 million and the share purchase price was not only paid for immovable property, but also for the business, including movable properties, the customer database, personnel, intellectual property and IT.

The Court of Appeal, on the other hand, ruled that the business operations of BV Y did not differ substantially from the operation of a hotel business (‘a hotel for goods’; goederenhotel) which according to the parliamentary proceedings falls outside of the scope of the purpose requirement. The Court of Appeal also considered it plausible that the attractiveness of the storage facilities is largely determined by, inter alia, the various services offered by BV Y. This implies that the immovable property is more instrumental to the exploitation of an advanced storage business than to the exploitation of only immovable property. BV Y did therefore not meet the purpose requirement and, consequently, did not qualify as a Dutch real estate entity.

Following the appeal before the Supreme Court by the Under-Minister of Finance, the Supreme Court ruled that BV Y did not meet the purpose requirement if the provision of the immovable property is subordinate to the overall services provided to its customers. This should be assessed from the perspective of the customers of BV Y and therefore business activities that are not aimed at individual customers (i.e. overhead expenses) are not relevant in this context. The Supreme Court referred the case to the Amsterdam Court of Appeal for factual investigation as the Court of Appeal of The Hague failed to recognize or substantiate why, in this situation, the provision of all or parts of the immovable property to the customers are subordinate to the services provided by BV Y to its customers.

(d) Amsterdam Court of Appeal

The Amsterdam Court of Appeal now ruled, in short, that it is plausible that BY’s services, from the point of view of the customers, consisted of at least 70% of the exploitation (by way of leasing) of immovable property and that its other services were subordinate to this lease. BV Y therefore meets the purpose requirement and qualifies as Dutch Real Estate Entity.

The Amsterdam Court of Appeal adequately and comprehensibly explained its decision. First of all, the Amsterdam Court of Appeal held that it follows from the framework agreement, and the general provisions, between BV Y and its customers that what they agreed was aimed at the exploitation of immovable property (storage facilities) by making these temporarily available against payment of rent. In the opinion of the Amsterdam Court of Appeal, the customers did not give their goods in custody, as BV X argued, because BV Y and its customers explicitly excluded the presence of a custody agreement in the framework agreement, and that the content of the obligations between them did not correspond to such an agreement either. For example, BV Y did not have the typical duty of care of a custodian.

Subsequently, the Amsterdam Court of Appeal held that in the totality of services provided by BV Y to its customers, the lease services were not subordinate to the other services provided to those customers.

The Amsterdam Court of Appeal:

• followed the Dutch tax inspector in its position that the climate control and security of the storage facilities in this situation are elements of the service inherent to the lease. In this respect the Amsterdam Court of Appeal held the lease of the storage facilities is based on the floor space without charging a separate fee for climate control. The framework agreement and the general conditions also did not contain any separate obligations for BV Y regarding climate control so that it is considered plausible that BV Y is not subject to any obligation more far-reaching than is customary for a lessor of storage facilities.

• found it plausible that the customers of BV Y are interested in the lease of storage facilities. The optional services without payment, consisting of assisting in and advising customers on suitable storage spaces, assisting in the storage and removal of materials in the storage spaces, the security and screening of customers and the provision of trolleys, will only be used if customers consider this necessary or desirable in light of their lease. 

• stated that the aforementioned applies mutatis mutandis to the services offered by BV Y against the payment of a fee, such as the sale of packing and/or storage materials and locks, the taking out of insurances with regard to the goods present in the establishments and the rental of trailers. The Amsterdam Court of Appeal considered it plausible that, from the perspective of the customers, these services are also subordinate to the lease. This also followed from the ratio between the lease income (94.4% of the total turnover) and the turnover from other services (5.6% of the total turnover). The total of BV Y's services did also not constitute a more comprehensive service (custody or "unburdening") to which the lease is subordinate.

• saw an additional indication that the customers are interested in the lease, and not in the other services, in the fact that BV Y advertises with the lease of storage facilities, and not with giving advice or other services.

The Amsterdam Court of Appeal, however, determined the taxable base in the proper administration of justice at € 95 million (instead of € 107 million) whereby it took into account that, inter alia, the acquisition included more than just immovable property, as well as the arguments and document submitted by the parties, including the consolidated financial statements of BV Y. The Amsterdam Court of Appeal ruled that the additional Dutch RETT assessment should be reduced according to such taxable base.

Final remarks

Based on the relevant facts of this case, the outcome of the Amsterdam Court of Appeal decision is in line with the expectations. The grounds for an appeal for BV X seem limited, as the Amsterdam Court of Appeal adequately and comprehensibly explained its (factual) decision. The Amsterdam Court of Appeal’s decision does not, however, provide sufficient insight into how it determined the taxable base at € 95 million - which is € 10 million (i.e. € 600k Dutch RETT) higher than the Court of Amsterdam determined - so that the taxable base may potentially remain in dispute.

The practice is now looking forward to another decision of the Amsterdam Court of Appeal in respect of the purpose requirement, i.e.  whether an entity that owns a hotel building, but has the hotel rooms and facilities operated by a third party, meets the purpose requirement and, where it meets the ownership requirement, qualifies as a Dutch real estate entity. That decision is also very relevant as it is not unusual that the exploitation of the hotel is split from the ownership of the hotel building. To be continued.