TAX
considerations for Dutch real estate investments
Boris Emmerig
Tax Partner
Amsterdam
Rutger Oranje
Real Estate Partner
Amsterdam
Dutch tax legislation contains numerous attractive
facilities to structure portfolio investments in real estate.
The participation exemption is well known, as well as the
BV/CV-structure. Investors are keen on these facilities
because with careful planning the use of these can result
in high investment yields after taxes. One of the facilities
that has been in the spotlight for many years already is
the “Fiscale BeleggingsInstelling” (FBI) or fiscal portfolio
investment company. The FBI is subjected to Dutch
corporate income tax, although at a rate of 0 percent.
This means that rental income and capital gains realized
on the sale of a real estate investment are effectively not
taxed. This of course bolsters the yield on the
investments significantly. All profits must be distributed
to the shareholders within eight months after the close
of the financial year. A 15 percent Dutch dividend
withholding tax is due on these distributions.
For non-Dutch shareholders it is important that an FBI is
treated as a resident for the purpose of international tax
treaties. On the basis of these treaties the rate of 15
percent can often be lowered. The Netherlands has one
of the most extensive treaty networks available. Any
Dutch dividend tax that remains can often be credited
against the tax due by non-Dutch shareholders.
Distributions in the form of shares are also permitted
as well as in cash. Investments in real estate can be
financed with up to 60 percent leverage of the book
value (acquisition price minus depreciation). Within the
first two years after incorporation this leverage can be
even higher.
There are rules regarding the categories of shareholders.
In essence these rules are aimed at ensuring the FBI is
an investment vehicle for the wider public and that it is
not used as a portfolio investment company for internal
use within a group of companies. Careful planning is
required here.
This set of characteristics has resulted in a wide use of
the FBI as investment vehicles in real estate, and also
in other types of investments. There are no limitations
as to the type of investments, for example it can even
concern investment in wine. The only limitation is
that it must be a portfolio investment. In other words,
the FBI is not a suitable vehicle to undertake
entrepreneurial activities.
For investments in real estate this may be a limitation.
There is of course a difference between straight forward
investment in real estate portfolios on one hand and
development of real estate on the other. An FBI is not
allowed to develop its real estate investment portfolios.
For these purposes, development of real estate can entail
negotiations with property owners, the process of
obtaining building permits, the involvement of architects,
arranging the finance facilities, the purchase of land, the
actual building process and (possibly) a sale of the real
estate. In addition, development of real estate has a
higher risk profile than one could expect from normal
portfolio investments.
For FBI’s that are active in real estate portfolio
investment, it has become increasingly desirable to get
more involved with their investments, particularly in the
current climate. The ever increasing demands of tenants
of, for example, shopping centres or office buildings
make it necessary for FBI’s to adjust and upgrade their
real estate to meet the demands and needs of the
market. Also other players in a particular market, such as
local government and local residents, may wish to have
influence on the look and feel of the property.
Dutch tax legislation is sensitive to the needs of the
market. Since 2007 the Dutch tax act makes it possible
for FBI’s to redevelop properties that are already held in
their portfolio or to develop new real estate. In order to
do so the FBI can incorporate a wholly owned subsidiary
– usually a BV - that undertakes the project development
activities. The BV is a normal taxable entity, which means
a rate of 20 percent over the first EUR 200,000 profit
and 25.5 percent for the surplus. All activities and risks
connected with the project development are situated
outside the FBI in this way.
There are substantial risks to the realization or the value
of a project, which go beyond the risks that can be
associated with normal active portfolio investments.
Examples are risks connected to the acquisition of land,
zoning risks, the risk of obtaining a building permit and
the risk of exceeding costs or building dead lines. A
development fee has to be agreed between the
development BV and the FBI. This fee has to be
established under the same conditions that would also
have been agreed upon between parties that are totally
independent from one another. In many cases the FBI
will become the director of the development BV and
will be paid a fee for any management activities. This
mechanism helps in reducing the net fee that has to be
paid to the development BV and therefore the taxable
profit of the development BV. As a result the profit out
of the development activities will be normally taxed at
the level of the development BV, while to portfolio
investment profit will continue to be taxed at a rate of
0 percent at the level of the FBI.
It is widely accepted in the Dutch tax practice that an
upfront ruling can be concluded with the Dutch tax
authorities on the fee that is due to the development BV.
In this way any uncertainty about possible future
unpleasant tax surprises is avoided.
It is not necessary that the FBI transfer the real estate
it wants to redevelop to the Development BV. Also any
real estate in the development pipeline can be acquired
directly by the FBI. In any case all (re)development
activities and all risks that are connected with such
activities need to be allocated to the development BV.
In cases where it is desirable to transfer the real estate
to the development BV, the transfer may be effected
without the levy of VAT and real estate transfer tax,
although this is not always a given.
The tax legislation provides for a safe harbour-rule
because there is not always a clear distinction between
project development and major maintenance. This rule
states that if an investment in maintenance or upgrading
of a property does not exceed 30 percent of the value of
the property as set by the tax authorities on the basis of
the so called WOZ (Act on valuation of real estate) prior
to the investment, then this investment is deemed to fall
within the scope of portfolio investment. In this case the
incorporation of a separate development BV is not
necessary. In cases where the threshold of 30 percent is
exceeded, this does not automatically imply that there
will be project development activities. This has to be
determined on a case-by-case basis. Also here it is
possible to discuss this upfront with the Dutch tax
authorities. Careful planning is required. It is possible to
structure the investments in such a way that the limit of
30 percent per investment is not exceeded. This limit is
tested by investment and not by time period. It therefore
may be wise to break down a large investment into
smaller stand-alone investments with a material
character of their own.
This new regime for real estate project development
shows that the classic pattern for real estate portfolio
investment, being buy - hold - sell and nothing more, is
no longer the trend. The tax legislator has acknowledged
that the reality is more complex than that. One could call
this tax logistics. Another reason for this regime is that
the Netherlands is making a solid effort to remain as
attractive as possible for foreign investors, certainly also
in times when investment volumes have dropped
significantly. Therefore other types of investment vehicles
have also seen adjustments to make them more
attractive, such as CV’s and mutual funds.
The next step in this process may be the abolishment
of dividend withholding tax, but that is still under
consideration by the Dutch Ministry of Finance.
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