Draft bill published to exclude RETT concurrence exemption for share deals
The Dutch government launched an online consultation on a draft legislative proposal to exclude the application of the RETT concurrence exemption (samenloopvrijstelling) as per 1 January 2024 in case of the acquisition of a qualifying share interest in companies owning newly developed real estate (the “Draft Proposal”). The Draft Proposal aims to combat situations in which the acquisition of real estate is structured through a share deal (instead of an asset deal) to achieve a VAT advantage (as no VAT (and no RETT) would be due in case of a share deal, whereas non-recoverable VAT (and no RETT) would be due in case of an asset deal) and to reduce the inequality in the playing field between an asset deal and share deal. The Draft Proposal however seems to have a broader effect than the situations it intends to combat and results in overkill in case obtaining a VAT advantage is not the reason for structuring the acquisition of real estate through a share deal (for instance if the purchaser can fully deduct its input VAT). In addition, the Draft Proposal does not contain a transitional rule for pending transactions, such as forward purchase transactions whereby the sale and purchase agreement has already been concluded, but the completion of the transaction is envisaged in 2024 (or later).
In this blog post Ashley Peeters and Johan Vrolijk will discuss the Draft Proposal and the potential implications for the Dutch real estate market.
Based on current law, the VAT and RETT implications of an acquisition of real estate structured through (i) an asset deal versus (ii) a share deal are as follows:
Re (i) Asset deal
The direct acquisition of real estate before, on or within two years after the real estate has been put into first use or building land (new real estate) through an asset deal is subject to VAT by operation of law and, provided certain conditions are met, exempt from RETT (concurrence exemption). The RETT concurrence exemption (samenloopvrijstelling) has been introduced to prevent the cumulation of VAT and RETT when acquiring new real estate. For purchasers that cannot recover their input VAT - e.g. lessors of residential property or lessors leasing commercial property to parties that perform VAT exempt activities, such as educational institutions, pension funds, banks and insurance companies and healthcare providers - VAT forms an expense.
Re (ii) Share deal
The acquisition of shares in a company owning new real estate is exempt from VAT. If such company qualifies as a real estate company for RETT purposes (“real estate company”), the acquisition of a qualifying share interest (i.e. 33 1/3% or more) in such company is subject to RETT. In case of a share deal it would therefore in principle not be possible to apply the RETT concurrence exemption since there would be no cumulation between VAT and RETT (as no VAT is due on the acquisition of shares). In 2011 the Dutch Supreme Court however ruled that the RETT concurrence exemption can also be applied in respect of the acquisition of shares in a real estate company, had the RETT concurrence exemption been applicable in case of a direct acquisition of the real estate via an asset deal (the so-called “look through” approach). As a result, no VAT and, provided the conditions are met, no RETT would be due in respect of the acquisition of shares in a real estate company owning new real estate. For purchasers that cannot recover their input VAT (see above) acquiring new real estate through a share deal could therefore be beneficial as it results in a lower tax burden (no VAT and no RETT) than an acquisition through an asset deal (non-recoverable VAT and no RETT).
However, if the acquisition of new real estate is structured through a share deal, the VAT on the goods and services purchased by the seller as part of that VAT exempt share deal is not deductible and therefore forms a cost for the seller (that will indirectly be passed on to the purchaser). The actual VAT savings of a purchaser in a specific share deal therefore strongly depends on the seller’s (non-deductible) VAT on the goods and services purchased by the seller as part the of VAT exempt share deal. For example, it is relevant how (and for what land price) the seller acquired the land in the past (and with or without VAT or RETT) and whether the seller employs (no VAT) or hires (VAT) the personnel developing the new real estate. In practice, the actual VAT savings for the purchaser may therefore be less than 21%.
Draft legislative proposal
The Dutch government is of the opinion that structuring an acquisition of new real estate via a share deal (instead of an asset deal) to achieve the abovementioned VAT advantage is undesirable and also not intended. At the moment the Dutch tax authorities can however not combat these VAT saving structures as they are in line with the abovementioned laws and regulations and case law.
In the Draft Proposal, the Dutch government therefore proposes to exclude the application of the RETT concurrence exemption in case of the acquisition of a qualifying share interest in a real estate company owning new real estate. In addition, if the Draft Proposal is adopted, the Dutch government also intends to remove a confirmation from a ministerial decree pursuant to which partners in non-legal entities, such as a limited partnership (commanditaire vennootschap), can currently acquire new real estate without VAT and RETT, to ensure that such transactions are treated equally as share deals.
By excluding the application of the RETT exemption, the Draft Proposal aims 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. The Draft Proposal does not aim to create a complete level playing field between parties that acquire new real estate through an asset deal and share deal, but, if adopted, will partially remove the advantage of the undesired VAT savings by levying 10.4% RETT (2023 rate) in case of the acquisition of shares in a real estate company owning new real estate as per 1 January 2024.
The Dutch government also noted that if it would appear in practice that parties will try to avoid the effect of this Draft Proposal by structuring a share deal such that for RETT purposes there is not taxable acquisition of shares in a real estate company - e.g. by having four cooperating parties each acquire 25% (i.e. less than 33 1/3) of the shares in the real estate company - it may consider introducing a cooperating group (samenwerkende group) concept in the legislation.
It is envisaged that the Draft Proposal will come into force as of 1 January 2024. Interested parties may submit their input on the public consultation until 27 March 2023. After consultation, the Draft Proposal will be sent to the Council of State for advice before being submitted to Dutch Parliament for adoption.
Implications for the Dutch real estate market
If the Draft Proposal would be adopted in its current form, this would have an impact on all acquisitions of new real estate structured through a share deal as per 1 January 2024.
The Draft Proposal results in overkill because for certain purchasers (for example, purchasers that can fully recover their input VAT) structuring the acquisition through a share deal will 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). This may force these purchasers into an asset deal, whereas there may also be sound business motives to structure the acquisition as a share deal (e.g. mitigation of liability). This overkill is also acknowledged by the Dutch government, but is considered difficult to avoid, since according to the Dutch government this results from specific business circumstances of the seller and the purchaser. This explanation is by no means convincing, especially since the rationale for introducing the real estate company concept in the past was precisely to ensure that the acquisition of real estate through an asset deal and share deal is treated equally from a RETT perspective. For this group of purchasers the Draft Proposal would therefore create an unequal treatment between acquisitions of new real estate structured through an asset or share deal.
In addition, the Draft Proposal does not contain a transitional rule for pending transactions, such as forward purchase transactions whereby the sale and purchase agreement has already been concluded, but completion of the transaction is envisaged in 2024 (or later).
In case of share deals involving a real estate company with an envisaged completion date in 2024 (or later), we recommend already considering at this time whether a share deal is still more beneficial than an asset deal and, if not, looking at restructuring options.
Should you have any questions, or would like to discuss the VAT and RETT implications of the Draft Proposal for an envisaged transaction, please feel free to contact us.
 In short, a company qualifies as an real estate company if (i) it concerns a legal entity with a capital divided into shares, (ii) 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 real estate and at the same for at least 30% of real estate situated in the Netherlands and (iii) the real estate, taken as a whole, at the moment of acquisition or at any moment in the 12 months preceding the acquisition - on a consolidated basis - are, or were, instrumental (dienstbaar aan) for at least 70% to the acquisition, disposal or exploitation (e.g. leasing) of such real estate.