Supreme Court: German fund with Dutch real estate not subject to corporate income tax
Under the Dutch Corporate Income Tax Law 1969 (CITA 1969), specific foreign legal entities, partnerships and special-purpose funds (“doelvermogens”) may be subject to Dutch corporate income tax on Dutch source income, such as income from Dutch real estate, as foreign taxpayers. The Supreme Court had to answer the question whether a German Immobilien-Sondervermögen (hereinafter: German fund) that is comparable to a Dutch mutual fund qualifies as a non-resident taxpayer in the Netherlands on the basis of its legal form. The Supreme Court has now ruled that this is not the case.
What does this mean for your organization?
This judgment of the Supreme Court is important for foreign mutual funds that invest in Dutch real estate. The Supreme Court has indicated the circumstances under which these funds are liable for corporate income tax under the current legislation (up to and including 2024).
However, its practical importance is limited in future. As of 1 January 2025, the CITA 1969 will be amended, as a result of which such funds will be subject to Dutch corporate income tax from then on. In addition, from 1 January 2025, the so-called FBI regime will no longer apply to Dutch and foreign funds that invest directly in Dutch real estate.
Case
The Immobilien-Sondervermögen (German fund) is established in Germany and incorporated under German law. Under German civil law, that fund is regarded as separate assets without legal personality. The German fund has issued participation certificates to its participants that are freely transferable. The fund is similar to a Dutch mutual fund.
The fund invested in Dutch real estate, which raised the question whether the German fund was liable to corporate income tax in the Netherlands. In order to be considered a non-resident taxpayer for corporate income tax purposes, an entity must meet the following three cumulative requirements:
1. the entity is not resident in the Netherlands;
2. the entity can be classified among the list of qualifying foreign entities included in the CITA 1969, and
3. the entity receives Dutch source income.
The dispute was whether, by virtue of its legal form, the German fund was included in the list of qualifying entities contained in the CITA 1969 (criterion 2). In the first place, the Supreme Court ruled that the list of foreign entities that can qualify as non-resident taxpayers included in the law is an exhaustive list.
The Supreme Court decided that the German Fund is not considered a so called ‘doelvermogen’ as the equity of the German Fund belongs to the holders of the participation rights issued by the fund. As the German Fund does not qualify as a corporation or partnership either, it does not qualify as a non-resident taxpayer for Dutch CIT purposes.
Since the German fund does not fall under the other categories of qualifying foreign entities and the list is exhaustive, there is no question of a foreign taxpayer for Dutch corporate income tax purposes.
Background to the procedure
The German fund started the lawsuit because it was treated less favourably than comparable Dutch resident funds. Funds domiciled in the Netherlands can make use of the Dutch so-called FBI regime under certain conditions, which means that they are subject to a Dutch corporation tax rate of 0%.
According to the tax authorities, the German fund was not eligible for the FBI regime because the investors in the fund could not be subject to Dutch (dividend withholding) tax, as is the case with investors in a Dutch FBI. The German fund argued, on the basis of EU law, that the refusal of the FBI regime constitutes an obstacle to the free movement of capital that cannot be justified, as has also been decided in previous case law of the EC Court of Justice.
Following a decision of the Supreme Court in 2020, the German Fund added the argument that it does not qualify as a non-resident taxpayer for Dutch CIT purposes, as it should not be considered a ‘doelvermogen’, and also does not qualify as a corporation or partnership. As a subsequent argument, it claimed that if it were subject to Dutch CIT, it should be allowed to benefit from the Dutch FBI-regime (i.e., 0% CIT rate), just as comparable Dutch resident funds.
In its judgment of 14 June 2024, the Supreme Court ruled that the German Fund does not qualify as a non-resident taxpayer and as such is not subject to the Dutch corporate income tax. The Supreme Court therefore did not address the question whether the refusal to apply the FBI regime is contrary to EU law.
Contact us
Global Real Estate Tax Leader, PwC Netherlands
Tel: +31 (0)65 398 48 10
