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RETT Changes to Benefit Dutch Real Estate
In June 2011 the Dutch Supreme Court made an important and noteworthy ruling regarding Dutch real estate transfer tax (RETT). The Court ruled that an RETT exemption for the direct acquisition of Dutch real estate also applies to the acquisition of shares in a Dutch real estate company, i.e. an indirect acquisition. The decision is beneficial for the real estate sector, now that an asset deal and a share deal are treated equally for RETT purposes, since additional benefits may be achieved by structuring the transaction as a share deal. Another welcome piece of news for the Dutch real estate market is the (temporary) reduction of the RETT rate for the acquisition of homes from 6% to 2%. The reduction has been made in order to stimulate the Dutch housing market. Taxand Netherlands looks at the RETT ruling and benefits for Dutch real estate investors.
RETT exemption also applicable to share deals
RETT is charged on the acquisition of Dutch real estate at a rate of 6% (2% for homes) and is calculated on the fair market value of the real estate. The acquisition of shares in a so-called 'real estate company' is also subject to RETT at 6% (2% for homes) of the fair market value of the underlying real estate.
The acquisition of shares in a real estate company is only subject to RETT if the acquirer owns or acquires a substantial interest (i.e. directly or indirectly an interest of at one third or more) in that company.
Since January 2011 an entity qualifies as a real estate company if at least 50% of the assets at the time of acquisition or at any time during the previous year consist or consisted of real estate (or real estate rights) and 30% or more of this real estate is located in the Netherlands. A subsequent condition is that 70% or more of the real estate is or was used for acquisition, trading or operation (e.g. renting, development).
Dutch value added tax (VAT) will be levied on supplies of goods and services in the Netherlands. However, supplies of real estate are VAT exempt, except for supplies of 'newly' built real estate (i.e. before, or within two years of, first use) and supplies of building land. If such newly built real estate is acquired both RETT and VAT are, in principle, chargeable on the acquisition. To avoid both VAT and RETT being levied in such a situation, a RETT exemption applies in principle (anti-accumulation exemption) if the real estate has not been used.
Until June 2011 a relatively common view was that the anti-accumulation exemption could only be applied in the event of a direct acquisition and not in the case of an acquisition of shares in a real estate company holding the newly built real estate. The rationale behind this was that, unlike a direct acquisition, an acquisition of shares is VAT exempt. As a result, the conditions for claiming the exemption would not be met. This is why, in practice, newly built real estate was mostly acquired directly. However, the reasoning behind the Dutch Supreme Court's June 2011 decision was quite different. It was held that acquisition of shares in a real estate company should be taxed as if the real estate were acquired directly, as a result of which the anti-accumulation exemption would also apply if shares in a real estate company owning newly built real estate were acquired.
In short: the exemption applies regardless of whether the acquisition is direct or indirect. This flexibility is beneficial for the real estate sector.
Reduced RETT rate for homes
On 21 July 2011 the Secretary of State for Finance announced that the RETT rate for the acquisition of real estate for a private residence would be temporarily reduced from 6% to 2% in the period running from 15 June 2011 until 1 July 2012. In the case of a mixed use of the real estate, the 2% RETT rate only applies in respect of the part of the property to be used as a private residence. However, if at least 90% of the property is used as a private residence the 2% RETT rate applies to the whole property. Furthermore, the 2% RETT rate is also applicable where shares in a real estate company owning the real estate for private residence are acquired. Investors that acquire homes also benefit from the reduced rate.
Based on the above-mentioned recent Court decision, businesses considering the acquisition of newly built Dutch real estate should review both asset and share deal alternatives in order to achieve the most beneficial structure. In this respect, the advantage of a smaller cash payment as a result of a deduction for deferred tax should be weighed up against the drawback of a lower tax base for depreciation and the possibilities of offsetting interest expenses against rental income. Parties that have previously paid RETT on a share acquisition that may have been exempt should consider whether an appeal against the tax assessment is still possible. Furthermore, we would like to highlight the (temporary) reduced RETT rate applicable to Dutch properties used as a private residence. After all, since the reduced rate is also open to investors, there may be a commercial opportunity to buy homes at an attractive price.
Your Taxand contact for further queries is:
Henk de Graaf
T. +31 20 757 09 12
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