On 20 September 2022, the Dutch Ministry of Finance announced its intention to abolish the Dutch REIT-regime effective 1 January 2024. The Dutch REIT-regime is known as the fiscal investment institution (FBI) regime for real estate investments. The legislative proposal to abolish the FBI-regime for real estate investments will be published in September 2023. As the abolishment conflicts with the conclusions drawn earlier this year by an investigative committee appointed by the Ministry of Finance, we expect a lobby and further discussions in the Dutch Parliament. This publication briefly elaborates on the tax mechanics of the FBI-regime, the reasons for the abolishment and what to consider looking ahead as we enter another period of uncertainty.

Tax mechanics

The Dutch fiscal investment institution (FBI) regime is a Dutch corporate income tax facility that can be applied by listed and non-listed, regulated and unregulated, investment entities. The facility is broader than real estate investments and can, for example, also include securities. The FBI-regime is often applied by pooling entities of institutional investors.

Under the FBI-regime, income and capital gains are effectively exempt from Dutch corporate income tax as a 0% rate applies. To qualify for the FBI-status, certain requirements must be met on a continuous basis. These requirements cover the activities, distributions, investors, legal form, financing and governance. Taxable profits have to be distributed within eight months after the end of each fiscal year. Such distributions are in principle subject to 15% Dutch dividend withholding tax. Capital gains can, subject to certain formalities, be distributed free from dividend withholding tax. This means that an FBI is effectively subject to 15% taxation over, shortly put, its net rental income.

An FBI-entity cannot apply the Dutch dividend withholding tax exemption based on the EU Parent-Subsidiary Directive. However, certain FBI-investors that are exempt from corporate income tax can claim such exemption through a reclaim procedure (e.g., qualifying Dutch and foreign pension funds). As an FBI is considered a tax resident of the Netherlands it is in principle eligible for withholding tax exemptions and reductions under the double tax treaties concluded by the Netherlands.

Evaluation of the FBI-regime for real estate investments

In 2018, the Dutch State Secretary of Finance announced an investigation to assess whether the FBI-regime for real estate investments can be amended in a targeted manner. The reason for this investigation was that the FBI-regime can lead to ‘tax leaks’, as effectively zero taxation over income derived from Dutch real estate investments is possible for certain foreign investors:

1. Foreign investors in an FBI-entity that are eligible for a dividend withholding tax exemption (or reduction) under a double tax treaty concluded by the Netherlands.
2. Foreign investment funds that directly hold Dutch real estate and claim the FBI-status, whereby the foreign investment fund is outside the scope of Dutch dividend withholding tax. 

The second situation is currently pending a decision from the Dutch Supreme Court. This decision is expected to, shortly put, determine under which conditions a foreign investment fund can claim the Dutch FBI-status considering the EU’s free movement of capital. A similar case concerning German real estate investments – known as ‘L Fund’ – is pending a decision from the Court of Justice of the EU.

On 7 July 2022, the Dutch Ministry of Finance finally shared the results of the investigation. The investigative committee, amongst others, presented possible legislative solutions to solve the tax leaks listed above without an abolishment. Nevertheless, on Dutch Budget Day 2022, the Ministry of Finance announced an abolishment effective 1 January 2024.

Looking ahead

Timing – The legislative proposal to formalize the abolishment will be published on Budget Day 2023 (i.e., 19 September 2023) with an intended effective date of 1 January 2024. It will need to be approved by the Dutch Parliament. Although the intention to abolish is clear, it is good to be aware that the investigative committee concluded that an abolishment is disproportional. Other tax measures to mitigate the identified tax leaks were suggested. For example, disallowing investors in an FBI that hold an interest of 10% or more, or imposing an additional levy on distributions to investors with an interest of at least 10%. A similar levy is included in the UK REIT-regime and the Spanish SOCIMI-regime. The 10%-threshold relates to the fact that most double tax treaties allow for a dividend tax exemption (or reduction) for investors with an interest of at least 10%.

Lobby – Although not formally announced, it is expected that a lobby will be initiated against the abolishment.

Abolishment mechanics – The abolishment will be implemented by prohibiting entities that want to qualify for the FBI-regime from directly investing in Dutch and foreign real estate. An FBI would in principle still be allowed to invest in property companies. However, a structure involving taxable property companies held by an FBI is likely to lead to double taxation over the real estate income. All real estate related provisions within the FBI-regime will also be abolished (e.g., the 60% financing limitation and certain exceptions to the passive investment requirement).

Key tax consequences – Effective 1 January 2024, existing FBI-entities that directly invest in real estate will in principle become subject to standard Dutch corporate income tax at a headline rate of 25.8%. Directly prior to losing the Dutch FBI-status, all (property) assets should be re-valued to fair market value. A step-up (or step-down) in this respect should in principle be effectively exempt under the FBI-regime. The Ministry of Finance is investigating whether additional tax measures will be introduced to facilitate investors that want to get rid of an FBI-entity (e.g., as certain restructurings could trigger Dutch real estate transfer tax). Upon forfeiting the FBI-status, the Dutch domestic dividend withholding tax exemption based on the EU Parent-Subsidiary Directive will become available (provided relevant conditions are met). Possible optimizations of the Dutch tax position should be evaluated (including the possible interplay with the EU’s DEBRA-proposal).

Other items to be aware of – Over the past years, the Dutch government has renegotiated double tax treaties to explicitly exclude FBIs from dividend withholding tax exemptions and reductions, meaning investors in an FBI can no longer apply those tax treaty benefits. This is the formal tax treaty policy of the Dutch government, which aligns with the recommendations from the OECD included in the 2015 Final Report on Action 6: the Granting of Treaty Benefits in Inappropriate Circumstances. Examples of such double tax treaties are those with Switzerland, Cyprus, Ireland, the United Kingdom and United States. 

How can A&M help?

A&M is closely monitoring legislative developments regarding the Dutch FBI-regime for real estate investments. It is recommended to model the tax cost impact of the proposed abolishment and to review viable restructuring options to optimize the tax position going forward (if necessary). If you would like to exchange views or discuss, please feel free to get in touch with your usual A&M adviser, Roel de Vries or Nick Crama.