On 23 June 2023, the Dutch Ministry of Finance published a letter outlining its renewed policy intentions following feedback obtained through a public consultation to abolish the real estate transfer tax (RETT) exemption for the acquisition of shares in companies that own “building plots” or “newly built” real estate for Dutch VAT purposes. This exemption is known as the concurrence exemption (in Dutch: samenloopvrijstelling). The background and implications of this public consultation are described in our prior tax alert. 

The renewed policy intentions are a positive development for the Dutch real estate market as it eliminates certain overkill elements that were included in the public consultation earlier this year. The current Dutch RETT rate is 10.4% for investment property.

Public consultation

The public consultation that ran until 27 March 2023 targeted a specific VAT-saving structure used by investors that lease out real estate in a VAT exempt manner (e.g., the lease of residential property or property leased out to companies that perform VAT exempt activities such as pension funds, health care institutions, banks and insurance companies). Such investors cannot recover the input VAT that is mandatorily due on a direct acquisition of real estate that qualifies as a “building plot” or “newly built” for Dutch VAT purposes. For such investors it is generally beneficial to acquire the real estate through a share deal. In that case no VAT is due as a transfer of shares is exempt from VAT and the transfer would also be exempt from RETT by virtue of the concurrence exemption.

Renewed policy intentions

The legislative proposal that was part of the public consultation would have abolished the concurrence exemption for broadly all share acquisitions, whereas asset acquisitions would remain eligible. The concurrence exemption for similar acquisitions of partnership interests would also have been abolished. 

The legislative proposal would therefore have also impacted acquisitions of shares in companies that would have leased out the developed real estate in a VAT taxable manner. In other words, it would have also impacted investors that do not make use of the targeted VAT-saving structure.

The Dutch Ministry of Finance has now announced that this overkill will be eliminated from the legislative proposal by ensuring that the concurrence exemption for share acquisitions will remain available for qualifying acquisitions of shares in “real estate companies” that use the real estate for at least 90% for VAT taxable activities (e.g., VAT taxable lease) during at least two years following the acquisition.

For share acquisitions that are used for more than 10% for VAT exempt activities (e.g., VAT exempt lease of residential real estate), the concurrence exemption would no longer be available. This in itself would lead to a cumulation of Dutch RETT at 10.4% on the share acquisition on top of the Dutch VAT at 21% on the development costs. The Ministry of Finance therefore suggests to introduce a 4% RETT rate to ensure that the effective taxation ends up around 21%, which is equal to the VAT rate of 21% that would have been levied in case of an asset acquisition (which would have included the development gain).

The legislative proposal that accompanied the public consultation had an effective date of 1 January 2024 without any grandfathering rules.

The Dutch Ministry of Finance has now announced grandfathering for projects for which at least a letter of intent has been signed at the time the legislative proposal is submitted. The legislative proposal will be submitted on 19 September 2023 (i.e., Dutch Budget Day 2024). For projects that will be transferred after 1 January 2030 the grandfathering rule will not apply.

Lastly, the proposed effective date of the new rules will be 1 January 2025 (opposed to 1 January 2024).

A&M says

The VAT and RETT treatment of a real estate project can have a significant impact on its commercial feasibility. The elimination of overkill is a welcome development, but the rules will nevertheless be tightened which warrants careful consideration. The grandfathering rule puts pressure on entering into letters of intent before 19 September 2023.
 
If you would like to receive more information or discuss the impact, please feel free to get in touch with your usual A&M adviser, Roel de Vries, Tim Jansen or Nick Crama.