Major changes in the Dutch tax treatment of real estate

Exempt Investment Institution (vrijgestelde beleggingsinstelling, VBI)

As of 1 January 2025, only regulated vehicles under the Dutch Financial Supervision Law (Wet financieel toezicht) are eligible to the Dutch Exempt Investment Institution (vrijgestelde beleggingsinstelling, VBI) regime. Under the regime of the Dutch Exempt Investment Institutions investing in real estate is not allowed, so the impact of these rules for the real estate industry is limited. 

Mutual funds (fondsen voor gemene rekening, FGR)

As per 1 January 2025, the conditions under which a mutual fund (including a comparable foreign mutual fund) qualifies as transparent will change. The aim is to bring the transparency rules for Dutch investment funds more in line with international standards. Furthermore, the goal of the changes is to limit the non-transparent FGRs to funds qualifying as a fund under the Dutch Financial Supervision Act (ICBE or AIF). As from 2025, FGRs will only be considered non-transparent (and hence subject to Dutch corporate income tax and possibly applying specific tax exempt fund regimes) if:

1. the fund is an AIF or ICBE within the meaning of article 1:1 of the Financial Supervision Act; and
2. the units in the FGR are transferable, whereby units are considered non-transferable in case the units can only be transferred to the FGR itself via redemption (‘redemption mechanism’).

If the above conditions are not met, the FGR is considered transparent for Dutch tax purposes. Under current law, FGRs are also considered non-transparent in case a participant is allowed to transfer its participations in the FGR without the unanimous consent of all the other participants. This category of non-transparent FGRs will therefore be considered tax transparent as from 2025.

In case a current non-transparent FGR converts into a tax transparent FGR, this will have tax implications at the level of the fund as well as at the level of the investors. All the assets and liabilities of the FGR are deemed to be transferred to the unit holders against the fair market value. Corresponding gains are subject to corporate income tax at the level of the fund. In addition the unit holders are deemed to have transferred their units against fair market value. Any related gain may be subject to corporate income tax or personal income tax at the level of the taxable participants. Therefore, certain temporary facilities become available:

1. A roll-over facility whereby the tax claim on the hidden and tax reserves and goodwill present in the FGR is rolled over to the unit holders subject to Dutch corporate income tax. This facility only applies in case all the participants are subject to Dutch corporate income taxation.
2. A share merger facility, based on which participations can be contributed to a company in exchange for shares. Any gain realized on the contribution of the participation will be rolled-over in the tax basis of the new shares issued by the company.
3. A temporary and conditional exemption for real estate transfer tax in relation to the share merger mentioned under 2. A real estate transfer tax return must be filed in which the temporary exemption is claimed.

In case a taxpayer cannot use the roll-over facility mentioned under 1, a payment in installments of the corporate tax due over a period of maximum ten years is available.

The temporary facilities are applicable as from 1 January 2024, so that taxpayers can apply them prior to the change of qualification in 2025.

Income allocation rules for partnerships, FGRs and comparable foreign entities

In addition to the change in the qualification rules for partnerships and FGRs, the measures also contain a prescription on the basis of which assets and liabilities as well as the revenues and costs of a tax transparent entity are directly allocated to the participants. On this basis, the participant has to take into account these elements separately and not on a net basis as (revenues from) the participation in the transparent entity. This may result in additional tax compliance obligations.

Limitation tax depreciation on buildings for personal income tax purposes

Depreciation on buildings is only possible if the book value is higher than the ground value of the building. For income tax purposes, the ground value for buildings made available to third parties is equal to the so-called WOZ value and for buildings in own use 50 percent of the WOZ- value. For corporate income tax purposes, the ground value for buildings in own use is already equal to the WOZ value since January 1, 2019. This becomes also applicable for personal income tax purposes. After this amendment, for personal income tax purposes depreciation up to a maximum of the WOZ-value applies to all buildings that are used as business assets, regardless of whether it is an investment building or a building for own use.

This adjustment removes the distinction in depreciation limitations on buildings for personal and corporate income tax purposes.

Generic interest deduction limitation (ATAD I)

Although no proposal of law has been published yet, it has been announced that the generic interest deduction limitation (the so-called 'earnings stripping rules') with regard to real estate companies will be changed as of 1 January 2025. Under current law, interest expenses for Dutch corporate tax purposes are limited in deduction to the extent that the net financing costs exceed the higher of EUR 1 million or 20% of EBITDA (adjusted for tax purposes). As of 1 January 2025, the EUR 1 million threshold no longer applies to entities that own real estate that is rented (to third parties). For these tax payers financing costs exceeding 20% of EBITDA becomes non-deductible.

Treatment of share transactions for Real estate transfer tax

The so-called ‘concurrence exemption’ in the Dutch RETT legislation will be adjusted for the situation in which shares in a so-called 'real estate rich companies ' are acquired. Based on the current scheme, this exemption applies if the real estate property held by the company consists of new real estate for VAT purposes. If the real estate property is used for VAT-exempt activities, VAT can be saved by transferring the shares in the company that holds the real estate property. The transfer of shares is not subject to VAT and if the real estate property qualifies as new for VAT purposes, an exemption from RETT can still be applied. To avoid these savings, as of 1 January 2025, the exemption only applies to share transactions if the real estate property held by the company is used by the company - during a period of two years after acquisition - for activities that for at least 90 percent give entitlement to deduct VAT on costs. In other cases, where the real estate property held qualifies as new for VAT purposes, real estate transfer tax will be due at a rate of 4 percent. The 4 percent rate is based on the estimated VAT savings on a share transaction.

A transitional rule applies based on which the current rules can still be applied till 1 January 2030 if:

1. parties agreed in writing the acquisition of the shares before 19 September 2023, 3.15 p.m.; and
2. the acquirer has requested the Dutch tax authorities for application of the transitional rule before 1 April 2024 at the latest, which request encloses a copy of the written agreement; and
3. at the time the agreement was concluded, it was plausible that the main purpose of the agreement was not to qualify for the so-called ‘concurrence exemption’.

Classification rules partnerships

The adopted rules have a major impact on partnerships qualifying as non-transparent for Dutch tax purposes (such as the an Open CV and comparable foreign partnerships) as these partnerships become tax transparent as from 2025. Many foreign partnerships are currently regarded as non-transparent for Dutch tax purposes, because foreign countries do not use the ‘unanimous consent criterion’ as a condition for tax transparency. As a result of the legislative change, all Open CVs and other non-transparent (foreign) partnerships will be regarded tax transparent for Dutch tax purposes with effect from 2025. In principle, this means that the partnership has to make a final settlement for Dutch corporate tax purposes, resulting in taxation over the tax and hidden reserves, for example included in the real estate assets held by the partnership. To prevent this taxation, a roll-over facility becomes available but is only available if all partners in the partnership are subject to corporate income tax. In case natural persons or tax exempt investors are participant in the partnership, the facility is not applicable. For those situations, it would be possible that the partners not subject to Dutch corporate income tax first transfer the interest in the partnership into a company such as a limited liability company (besloten vennootschap, BV) in 2024. For this contribution, a temporary share merger facility is available for both personal income tax, corporate tax and real estate transfer tax purposes. If after this contribution all the participants in the partnership are subject to Dutch corporate income tax, the forementioned roll-over facility can be applied at the level of the partnership upon the change of the tax status of the partnership from non-transparent to tax transparent. In this way, a non-transparent partnership structure can be restructured into into a corporate structure.

Foreign non-transparent partnerships are regarded as tax transparent as from 2025. This means that these partnerships, to the extent they receive domestic income, are no longer subject to Dutch corporate income tax. For Dutch tax purposes, the assets, liabilities revenues and costs of the partnership will be allocated to the (foreign) partners in the partnership on a pro rata basis resulting in additional tax compliance obligations. From 2025 onwards, a foreign partnership is also no longer regarded as recipient/beneficiary for dividend withholding tax or conditional withholding tax (bronbelasting) purposes.

Dutch and foreign partnerships that qualify as non-transparent under current Dutch transparency rules, with a qualifying interest in a Dutch company, may be confronted with a conditional withholding tax on dividends in 2024 on the basis of the so-called hybrid provision in the Withholding Tax Act 2021. The Withholding Tax Act 2021 has been expanded with a withholding tax on dividends with effect from 2024.

This accumulation of the Tax Qualification of Legal Entities Act and the Withholding Tax Act 2021 is unintentional. The latter contains a provision on the basis of which hybrid entities (such as the open CV or a comparable foreign entity) are regarded as taxpayers for the Withholding Tax Act 2021. On the basis of the Tax Qualification of Legal Entities Act, the open CV will expire as of 1 January 2025 (and not, as the legislator intended, as of 1 January 2024). As a result of both measures, it may happen that during a period of one year - 2024 - dividend withholding tax can be levied under the Withholding Tax Act 2021 when an open CV (or a comparable foreign entity) is qualified differently in the Netherlands (i.e. as non-transparent) than abroad (i.e. as transparent).

A recent amendment to the Tax Qualification of Legal Entities Act responds to this unintended accumulation. The measure in the amendment provides for a transitional measure for the year 2024 for open CVs (or comparable foreign entities) that become liable to dividend withholding tax in 2024 on the basis of the provision for hybrid entities in the 2021 Withholding Tax Act. The transitional measure implies that the open CV (or a comparable foreign entity) will de facto be regarded as transparent in 2024 for the application of the Withholding Tax Act 2021 with regard to dividends. For dividends, it then applies that it is not the open CV (or the comparable foreign entity) as such, but each participant who has an interest in it, is - in proportion to its entitlement - regarded as the person entitled to those dividends.