As mentioned in our blog post of 3 March 2023, the Dutch government is of the opinion that structuring the acquisition of new real estate via a share deal (instead of an asset deal) to achieve a VAT advantage (as no VAT and no RETT would be due in the case of a share deal, whereas non-recoverable VAT, and no RETT, would be due in asset deal) is undesirable and also not intended. At the moment, the Dutch tax authorities cannot combat these VAT saving structures, as these are in line with the laws and regulations and case law. The Dutch government therefore on 27 February 2023 launched an online consultation on a draft legislative proposal to exclude the application of the RETT concurrence exemption on the acquisition of a qualifying share interest in a real estate company owning new real estate.
By excluding the application of the RETT concurrence exemption, the draft legislative proposal aimed to reduce the inequality in the playing field that has arisen between parties that, in order to save VAT and RETT, structure the acquisition of new real estate through a share deal and parties that structure the acquisition via an asset deal.
As mentioned in our previous blog post, the draft legislative proposal resulted in overkill because for certain purchasers (e.g., purchasers that can fully recover their input VAT) structuring the acquisition through a share deal would result in a higher effective tax burden (no VAT and 10.4% RETT) than if they purchased the new real estate through an asset deal (recoverable VAT and no RETT). In addition, the draft legislative proposal did not contain a transitional rule for pending transactions, such as forward purchase transactions whereby the sale and purchase agreement has already been entered into, but completion of the transaction would be envisaged in 2024 (or later).
Outcome of the online consultation
During the online consultation from 27 February to 27 March 2023, the real estate industry gave various responses to the draft legislative proposal. In addition, the Dutch government had a meeting with representatives from the real estate industry.
Although the desire of the Dutch government to combat VAT saving constructions is generally understood by the real estate industry, the draft legislative proposal had some sharp edges which may lead to negative consequences for new construction projects. The two main comments on the draft legislative proposal were (1) excessive taxation (overkill) in respect of newly developed real estate both for VAT exempt use (residential and healthcare properties) and use subject to VAT (office buildings); and (2) the lack of a transitional rule for pending projects.
Amendments to draft legislative proposal
As already announced in the Spring Memorandum (see our blog post of 4 May 2023) following the reactions on the online consultation, the Dutch government will amend the draft legislative proposal together with transitional law. However, the Spring Memorandum did not explicitly address whether, and how, the overkill in the initial draft legislative proposal will be eliminated from the amended legislative proposal.
To counteract this overkill, the Dutch government is now proposing that acquisitions of real estate structured through a share deal:
- may continue to benefit from the RETT concurrence exemption, provided that it involves an entity holding real estate (or rights in rem) that is used for 90% or more for activities subject to VAT (e.g. office buildings) for a period of two years after the acquisition; or
- be subject to a reduced 4% RETT rate (instead of the standard 10.4% RETT rate) if it involves an entity holding real estate (or rights in rem) that is used for more than 10% for VAT exempt purposes (e.g. residential or healthcare properties). As a result, the cumulative VAT and RETT burden will generally be approximately 21% (as the input VAT may not have been recoverable), which is similar to the 21% VAT rate that is levied in respect of the acquisition of newly developed real estate via an asset deal.
In addition, the Dutch government is proposing to include a transitional rule in the legislative proposal pursuant to which pending transactions are respected, provided that there is a signed agreement (e.g. a letter of intent) before the legislative proposal is envisaged to be published (i.e. before 19 September 2023 – see below) and the completion of the acquisition takes place ultimately on 31 December 2029. No transitional rule applies if the completion of the acquisition takes place after 1 January 2030.
Furthermore, the envisaged date of entry into force of the legislative proposal will be moved forward to 1 January 2025 (instead of an entry into force on 1 January 2024). 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).
Implications for the Dutch real estate market
The amendments to the draft legislative proposal are good news for the Dutch real estate market, as they remove some sharp edges which could have led to negative consequences for new real estate projects (including building land), e.g. overkill both for VAT exempt use (residential and healthcare properties) and use subject to VAT (office buildings).
In respect of pending transactions of real estate used for more than 10% for VAT exempt purposes (e.g. residential or healthcare properties), it is important that in order to be respected (and to continue to benefit from the RETT concurrence exemption) on the acquisition of shares in an entity that holds new real estate, (i) there should be a signed agreement (e.g. a letter of intent or SPA) before the date on which the legislative proposal is envisaged to be published (i.e. before 19 September 2023, Dutch Budget Day); and (ii) the completion of the acquisition should take place ultimately on 31 December 2029.