On April 9, 2021, the Dutch Supreme Court clarified that the acquisition of sole legal title to shares of a real estate entity holding Dutch real estate is subject to Dutch real estate transfer tax (RETT).
Although the Court of Appeal ruled that such an acquisition was not subject to the RETT because the acquisition did not represent a “real” interest in the underlying real estate, the Supreme Court reversed this judgment and clarified that the Dutch legislator never intended to exclude such transfers of legal ownership. of the RETT levy.
In 2015, a management company responsible for managing a German fund acquired legal title to shares in various real estate entities holding Dutch property. The German fund was a so-called Sondervermogen which has no legal personality and invests at the risk and on behalf of its investors. Typically, these funds appoint a management company to manage the fund and hold legal title to the underlying assets.
In subsequent cases before the District Court and the Court of Appeal, the question arose as to whether the acquisition of a single legal title to shares of a real estate entity holding Dutch property should be considered as the acquisition of an “interest” in a real estate entity subject to the RETT even if the acquirer is not entitled to the profits derived from these shares.
In favor of the management company, the court of appeal ruled that due to the restrictions of ownership rights on the shares and the fact that no economic rights are acquired, the management company did not acquire an “interest” in a real estate entity which is a condition for receiving the RETT.
The Dutch State Secretary for Finance appealed and argued that the Court of Appeal had misinterpreted the definition of interest in a real estate entity. According to the Secretary of State, the definition of a RETT taxable transfer is met when the acquisition of shares in a real estate company leads to the acquisition of ownership of the real estate company independently of obtaining economic ownership.
In short, acquiring the sole legal ownership of at least one third party in a real estate entity is also considered a RETT taxable event.
Real estate entity legal framework
The acquisition of legal title or economic ownership of immovable property or rights in relation to immovable property located in the Netherlands, for business purposes, is subject to 8% RETT. This tax is due on the purchase price or on the higher fair market value of the property. In order to prevent the avoidance of RETT by using an intermediary such as a legal person to acquire Dutch real estate, the acquisition of so-called “real estate entities” is also subject to RETT.
A “real estate entity” is an entity whose capital is divided into shares (usually a limited liability company), whose assets,
At the time of purchase or within 12 months prior to purchase;
Constituted or composed of at least 50% real estate and, at the same time, composed or composed of at least 30% Dutch real estate (the “Ownership Test”); and
At least 70% of the Real Estate is used for the acquisition, sale and operation of such Real Estate (the “Activity Test”).
If all the above conditions are met, the entity will qualify as a ‘real estate entity’, the acquisition of these shares will be subject to the RETT if:
The acquirer of these shares buys shares representing at least one-third interest in the value of the assets of the real estate entity; Where
After giving effect to the acquisition of the shares, the purchaser and all related parties will hold an interest of at least one third in the value of the assets of the real estate entity (the “acquisition criterion”).
Contrary to the decision of the Court of Appeal, the Dutch Supreme Court ruled that the acquisition of legal title to shares in real estate companies also constitutes a taxable RETT transaction. According to the parliamentary history of the Dutch RETT law, there is no reason to exclude from RETT the acquisition of legal title to shares in a real estate company.
In addition, the Supreme Court clarified the definition of a taxable RETT acquisition of shares in a real estate company. It involves nothing more than acquiring the shares representing some level of material control (eg through voting rights) in a real estate entity. The fact that the economic ownership belongs to the participants of the German fund is irrelevant to this question.
In short, for the purposes of the RETT, legal ownership will be treated the same as economic ownership.
This decision is particularly relevant for funds without legal personality. These funds need a management company, administration or custodian with legal personality to hold the legal title to their assets (eg real estate company).
Where the acquisition of economic ownership would not lead to RETT in the event that the individual investors behind the fund acquire less than one-third of the real estate entity, the acquisition of legal ownership often will because the management of the fund will acquire more than one-third (i.e. 100% of the real estate entity).
The good news is that RETT could still be prevented if the fund management company(ies) did not acquire more than one-third (of legal title) of the shares of the real estate entity. In addition, new legislation has been announced which could lead to more flexibility in the creation and structuring of investment funds acquiring Dutch real estate. More news will follow.
With the increase in the Dutch RETT rate for commercial real estate to 8%, the need for a tax efficient structure would be more necessary than ever.
Partner, DLA Piper
Email: [email protected]
Tax Advisor, DLA Piper
Email: [email protected]