On April 9 2021, the Dutch Supreme Court clarified that acquisition of sole legal title of shares in a real property entity holding Dutch property is subject to Dutch real estate transfer tax (RETT).
While the Court of Appeal ruled that such acquisition was not subject to RETT as the acquisition did not represent a ‘real’ interest in the underlying real property, Supreme Court overruled this judgment and clarifies that the Dutch legislator never intended to exclude these legal title transfers from the levy of RETT.
In 2015, a management company responsible for the management of a German fund acquired legal title of shares in various real property entities holding Dutch property. The German fund was a so-called Sondervermogen which has no legal personality and invests for the risk and account of its investors. Typically, these funds appoint a management company to manage the fund and to hold legal title of the underlying assets.
In the subsequent cases at the district court and the Court of Appeal, the question arose whether the acquisition of sole legal title of shares in a real property entity holding Dutch property should be considered as the acquisition of an ‘interest’ in a real property entity subject to RETT even if the acquirer is not entitled to the profits deriving from such shares.
In favour of the management company, the Court of Appeal ruled that due to the restrictions in ownership rights over the shares and the fact that no economic rights are acquired, the management company did not acquire an ‘interest’ in a real property entity which is a condition to levy RETT.
The Dutch State Secretary of Finance lodged an appeal and took the positions that the Court of Appeal wrongly interpreted the definition of interest in a real property entity. According to the state secretary, the definition of a RETT taxable transfer is met when the acquisition of shares in a real property company leads to the acquisition of the ownership of the real property company irrespective of whether economic ownership is obtained.
In short, the acquisition of solely the legal ownership of at least one-third in a real property entity is also considered to be a RETT taxable event.
Legal framework real property entity
The acquisition of the legal title to, or the economic ownership of a real estate or rights related to real estate located in the Netherlands, for commercial purposes, is subject to 8% RETT. This tax is due over the purchase price or the higher fair market value of the real estate. In order to prevent the avoidance of RETT by way of using an intermediary such as a legal person to acquire Dutch property, also the acquisition of so-called ‘real property entities’ is subject to RETT.
A ‘real property entity’ is an entity with capital divided into shares (usually a limited liability company), whose assets,
- At the time of purchase or in the 12 months preceding the purchase;
- Consist or consisted of at least 50% real property and, at the same time, consist or consisted of at least 30% Dutch real property (the ‘property test’); and
- At least 70% of the real property is being used for acquiring, selling and exploiting such real property assets (the ‘activities test’).
If all of the above-mentioned conditions are satisfied, the entity will qualify as a ‘real property entity’, the acquisition of these shares will be subject to RETT if:
- The purchaser of those shares purchases shares representing one-third or more interest in the asset value of the real property entity; or
- After giving effect to the acquisition of the shares, the purchaser and any related parties will own one-third or more interest in the asset value of the real property entity (the ‘acquisition test’).
Supreme Court judgment
Contrary to the Court of Appeal ruling, the Dutch Supreme Court ruled that the acquisition of the legal title of shares in real property companies also constitutes a RETT taxable transaction. According to the parliamentary history of the Dutch RETT Act, there is no reason to exclude the acquisition of the legal title of shares in a real property company from RETT.
Additionally, the Supreme Court clarified the definition for a RETT taxable acquisition of shares in a real property company. This entails nothing more than that the acquisition of the shares representing a certain level of material control (e.g. for example by way of voting rights) in a real property entity. The fact that the economic ownership lies with the participants of the German fund is not relevant for this question.
In short, for RETT purposes legal ownership will be treated similar to economic ownership.
This ruling 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 of their assets (e.g. real estate company).
Where the acquisition of the economic ownership would not lead to RETT in case the individual investors behind the fund do acquire below one-third of the real estate entity, the acquisition of the legal ownership often will because the fund’s management company will acquire more than one-third (i.e. 100% of the real estate entity).
The good news is that RETT could still be prevented in case the fund’s management company or companies may acquire not more than one-third (of the legal title) of the shares in the real estate entity. Further, new legislation has been announced which may lead to more flexibility in the set up and structuring of investment funds acquiring Dutch real estate. More news will follow.
With the increase of the Dutch RETT rate for commercial property to 8%, the need for a tax efficient structure would be necessary more than ever.
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