On Dutch Budget Day 2022 (i.e. 20 September 2022) several tax measures were announced which may affect real estate funds investing in or through the Netherlands. The announced abolition of the Dutch REIT regime comes as a bit of a surprise. Otherwise there are no real surprises, as most of the measures have already been announced or leaked. The most notable measures are the increase in the real estate transfer tax rate to 10.4%, the reduction in the VAT rate for residential solar panels to 0% and certain changes to the Dutch corporate tax rate structure. There are also measures that are relevant with regard to carried interests and management incentive plans. If you would like to know more or discuss the implications please contact your usual A&M adviser, Roel de Vries or Nick Crama.
Abolition of the Dutch REIT regime for direct real estate investments
The Dutch Ministry of Finance announced its policy intention to abolish the Dutch REIT regime for direct real estate investments effective January 1, 2024. The legislative proposal to formalize the abolition will be published on budget day 2023. As a result of the abolition, existing FBI entities are in principle subject to normal Dutch corporate income tax at a total tax rate of 25.8%. An FBI would still be entitled to own shares in taxable subsidiaries that invest directly in Dutch or foreign real estate. The Treasury is investigating whether to introduce additional tax measures to facilitate existing FBI entities wishing to restructure out of the FBI regime (e.g. as certain reorganizations could trigger a Dutch real estate transfer tax).
The Dutch FBI regime is a corporate tax relief that can be claimed by listed and unlisted, regulated and unregulated (real estate) investment companies. The facility is broader than real estate investments and may include, for example, securities. Under the FBI regime, income and capital gains are effectively exempt from Dutch corporate income tax as a 0% tax rate applies. Taxable profits must be distributed within eight months of the end of each financial year. Such distributions are in principle subject to a Dutch withholding tax of 15% on dividends. Subject to certain formalities, capital gains can be distributed free of Dutch withholding tax on dividends. This means that an FBI entity investing in real estate is effectively subject to a 15% tax on its net rental income.
In 2018, the Dutch Secretary of State for Finance announced for the first time an investigation to see if the FBI’s real estate investment regime could be changed. The reason for this investigation was that the FBI regime can lead to “tax leaks” as for certain foreign investors a virtual zero taxation of income from Dutch real estate investments is possible. This can be achieved, for example, when foreign investors in an FBI entity apply dividend withholding tax exemptions under double taxation treaties entered into by the Netherlands, or when foreign investors themselves claim FBI status when directly holding Dutch real estate investments.
The results of the FBI regime assessment were released on June 30, 2022. The investigative committee concluded that the proposed solution to abolish the FBI regime of real estate investments was disproportionate. Alternative solutions were presented.
Increase in real estate transfer tax rate for investment property to 10.4%
With effect from January 1, 2023, the real estate transfer tax rate for non-residential property and residential property acquired for investment purposes will be increased from 8% to 10.4%. The property transfer tax is levied on the purchaser. To still benefit from the 8% rate, transfers should be made before January 1, 2023. A conditional transfer by means of a so-called “Groninger deed” can offer a solution if a commercial purchase agreement can be reached before January 1, 2023, but the buyer cannot finance the purchase price until 2023.
Reduction of the VAT rate on private solar panels to 0%
Effective January 1, 2023, the VAT rate on the supply and installation of solar panels on or in the immediate vicinity of residential properties will be reduced from 21% to 0%. This is particularly relevant for investors in residential real estate who cannot (fully) refund VAT.
Increase of the corporate tax rate from 15% to 19% and reduction of the first tax bracket
With effect from 1 January 2023, the lower Dutch corporate tax rate will increase from 15% to 19%. The tax rate of 15% currently applies to the first tax class up to EUR 395,000. This first stage will also be reduced from 395,000 euros to 200,000 euros. As a result, Dutch corporate taxpayers are earlier subject to the corporate tax rate of 25.8%. The tax rate of 25.8% applies to all taxable income that exceeds the first tax bracket of EUR 200,000.
Limiting the 30% rule to the maximum salary in the public sector
Effective January 1, 2024, the income tax allowance will be capped at 30% of the gross salary of qualified expats. The cap is implemented by capping the salary that can benefit from the allowance. The limit is the maximum salary for the (semi) public service (2022: 216,000 euros). A transitional period of two years was announced. The 30% facility, also commonly referred to as the 30% facility, can be used by highly skilled migrants moving to the Netherlands for a specific job role.
Progressive income tax rates for income from substantial investments (Box 2)
With effect from 1 January 2024, the regime for substantial interest for Dutch income tax purposes consists of two tiers with progressive rates: taxable income up to EUR 67,000 is subject to 24.5% and all taxable income in excess of this is subject to 31%. The substantial interest regime is also commonly referred to as Box 2 and applies to taxpayers who are subject to Dutch income tax if they receive distributions or realize capital gains (or losses) from their substantial interests. Significant holdings are generally holdings in companies of 5% or more. This change is relevant to management equity/incentive plans and carried interest plans, which are typically subject to the significant interest regime.
Changes in personal income taxation of savings and investments (Box 3)
Personal income taxation of savings and investments is currently based on a notional return mechanism. Following a decision by the Dutch Supreme Court that taxation based on deemed restitution is contrary to the European Convention on Human Rights, legislation is being proposed to repair the past and adjust the regime for the future. The regulation will be adjusted for the years 2023, 2024 and 2025. In addition, the tax rate for savings and investment income will be increased by 1% pa from the current 31% to 34% in 2025. With effect from January 1, 2023, the tax-free assessment basis per person will be increased from 50,650 euros to 57,000 euros. From January 1, 2026, savings and investments are expected to be taxed on the basis of actual income less expenses, including (un)realized capital gains and losses. It was announced that the fair value movements of Dutch real estate will initially be based on a notional return mechanism before moving to taxation based on actual fair value movements. All of these developments should be considered when designing and structuring management equity/incentive plans and carried interests.
Budget increases for the Energy and Environmental Investment Facilities (EIA and MIA)
For 2023, the budgets for the Energy Investment Facility (EIA) and the Environmental Investment Facility (MIA) are increased to EUR 249 million and EUR 194 million, respectively. These budgets are not final. The budget for the Environmental Investment Depreciation Facility (Vamil) remains at EUR 25 million. Once the 2023 budgets are exhausted, the facilities will no longer be accessible. EIA, MIA and Vamil applications should therefore be submitted as early as possible in the year. The EIA targets investments in energy savings and renewable energies typically related to heating, cooling, LED lighting, ventilation and/or air conditioning in properties. The main real estate investments potentially qualifying for the MIA are circular utility buildings that have a “sustainability certificate” such as BREAAM, LEAD or GPR (and meet certain additional requirements).
Abolition of the landlord tax
The landlord tax will be abolished with effect from January 1, 2023. The landlord levy, in brief, applies to (legal) persons who own more than 50 apartments and whose monthly rent does not exceed the social housing limit (2022: 763.47 euros). As of the date of this publication, the legislative proposal to abolish the landlord tax has not yet been formally published by the Dutch government.
Other measures to consider
With effect from January 1, 2023, the gift tax allowance for gifts that serve to finance owner-occupied residential property will be reduced. The allowance for 2022 is EUR 106,671. The exemption will be completely abolished on January 1, 2024.
With effect from January 1, 2023, the real estate transfer tax exemption for “beginners” to purchase residential property for their own use will be increased to EUR 440,000 (2022: EUR 400,000).
All proposed measures are subject to change throughout the legislative process and must be approved by the Dutch Parliament to take effect.