On Dutch Budget Day 2022 (i.e. 20 September 2022), several tax measures were announced which could impact real estate funds investing in or through the Netherlands. The announced abolition of the Dutch REIT regime is a bit of a surprise. Apart from that, there are no real surprises, as most of the measures have already been announced in advance or have been leaked. The most notable measures are the increase in the property transfer tax rate to 10.4%, the lowering of the VAT rate on residential solar panels to 0% and certain modifications to the rate structure of the companies in the Netherlands. There are also relevant measures with respect to vested interests and management incentive plans. If you would like to find out more or discuss the implications, please do not hesitate to 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 has announced its political intention to abolish the Dutch REIT regime for direct real estate investments as of January 1, 2024. The Dutch REIT regime is also referred to as the Dutch Fiscal Investment Institutions (FBI) regime for real estate investments. The legislative proposal to formalize the termination will be released on Budget Day 2023. Following the termination, existing FBI entities will in principle be subject to standard Dutch corporate income tax at an aggregate rate of 25.8 %. An FBI would still be allowed to hold shares in taxable subsidiaries that invest directly in Dutch or foreign real estate. The Department of Finance is considering whether additional tax measures will be introduced to facilitate existing FBI entities wishing to restructure outside the FBI regime (for example, certain restructurings could trigger a Dutch real estate transfer tax).
The Dutch FBI regime is a corporate tax facility that can be applied by listed and unlisted, regulated and unregulated (real estate) investment entities. The facility is broader than real estate investments and may, for example, also include securities. Under the FBI regime, income and capital gains are effectively exempt from Dutch corporate income tax as a 0% rate applies. Taxable profits must be distributed within eight months of the end of each fiscal year. These distributions are in principle subject to a Dutch withholding tax of 15% on the dividends. Capital gains may, subject to certain formalities, be distributed free of Dutch dividend withholding tax. This means that an FBI entity investing in real estate is effectively subject to a 15% tax on, in short, its net rental income.
In 2018, the Dutch State Secretary for Finance first announced an investigation to assess whether the FBI regime for real estate investments could be changed. The reason for this investigation was that the FBI scheme can lead to “tax leakage”, as zero taxation on income from Dutch real estate investments is indeed possible for some foreign investors. This can, for example, be achieved where foreign investors in an FBI entity apply exemptions from withholding tax on dividends under double tax treaties entered into by the Netherlands or where foreign investors themselves claim the FBI status when directly holding Dutch real estate investments.
The results of the assessment of the FBI regime were released on June 30, 2022. The Board of Inquiry concluded that the proposed solution of abolishing the FBI regime for real estate investments was disproportionate. Alternative solutions were presented.
Increase the real estate transfer tax rate for investment properties to 10.4%
Effective January 1, 2023, the property transfer tax rate for non-residential property and residential property acquired for investment purposes will increase from 8% to 10.4%. Property transfer duties are levied on the purchaser. To continue to benefit from the 8% rate, transfers must be executed before January 1, 2023. A conditional transfer by means of a so-called “Groninger” deed can provide a solution when a commercial purchase agreement can be concluded before on January 1, 2023, but the buyer cannot finance the purchase price until 2023.
Reduction of the VAT rate on residential solar panels to 0%
From 1 January 2023, the VAT rate on the supply and installation of solar panels on or in the immediate vicinity of residential property will be lowered from 21% to 0%. This is particularly relevant for investors in residential real estate who cannot (fully) recover VAT.
Increase in the corporate tax rate from 15% to 19% and reduction of the first tranche
From 1 January 2023, the lower rate of Dutch corporation tax of 15% will be increased to 19%. The 15% rate currently applies to the first bracket of taxable income up to EUR 395,000. This first tranche will also be reduced from 395,000 euros to 200,000 euros. As a result, Dutch corporate taxpayers will sooner be subject to the 25.8% rate of corporation tax. The rate of 25.8% will apply in particular to all taxable income exceeding the first tranche of 200,000 euros.
Limitation of the 30% facility to the maximum civil service salary
As of January 1, 2024, the non-taxable allowance for payroll tax purposes equivalent to 30% of the gross salary of eligible expatriates will be capped. The ceiling will be put in place by limiting the salary that can benefit from the allowance. The limit will be the maximum salary in the (semi)public sector (2022: EUR 216,000). A transitional period of two years has been announced. The 30% facility is also commonly referred to as the 30% rule and can be obtained by highly skilled migrants moving to the Netherlands for a specific job.
Graduated personal income tax rates for substantial interest income (box 2)
From 1 January 2024, the substantial interest regime for Dutch personal income tax purposes will consist of two graduated rate brackets: taxable income up to EUR 67,000 will be subject to 24.5% and all excess taxable income will be subject to 31%. The substantial interest regime is also commonly referred to as box 2 and applies to taxpayers subject to Dutch personal income tax to the extent that they receive distributions or realize capital gains (or capital losses ) on their substantial interests. Substantial ownership interests are, broadly speaking, ownership interests in entities of 5% or more. This amendment is relevant to executive stock/incentive plans and deferred interest participations which are generally subject to the substantial interest regime.
Changes in taxation of personal income, savings and investments (Box 3)
The taxation of personal savings and investment income is currently based on a presumptive return mechanism. Due to a ruling by the Dutch Supreme Court declaring taxation based on presumptive return to be contrary to the European Convention on Human Rights, legislation is being proposed to offer reparations for the past and adjust the regime to the future. The scheme will be adapted for the years 2023, 2024 and 2025. In addition, the tax rate on income from savings and investments will be increased by 1% per year, from 31% currently to 34% in 2025. From 1 January 2023, the tax-exempt basis per person will increase from EUR 50,650 to EUR 57,000. As of January 1, 2026, it is expected that savings and investments will be taxed on the basis of actual income less expenses, including (un)realized capital gains and losses. It has been announced that movements in the fair value of Dutch real estate will initially be based on a deemed return mechanism, before moving to taxation based on actual movements in fair value. These developments should all be taken into account when designing and structuring management equity/incentive and vested interest plans.
Budget increases for energy and environmental investment facilities (EIA and MIA)
For 2023, the budgets for the Energy Investment Facility (EIA) and the Environmental Investment Facility (MIA) will be increased to EUR 249m and EUR 194m respectively. These budgets are not yet final. The budget for the environmental investment amortization facility (Vamil) will remain at 25 million euros. Once the budgets have been exhausted for 2023, the facilities are no longer accessible. EIA, MIA and Vamil applications must therefore be filed as early as possible in the year. The EIA targets investments in energy savings and renewable energy, which for real estate generally relate to heating, cooling, LED lighting, ventilation and/or air conditioning. The largest property investments that may be eligible for MIA are circular utility buildings that have a “sustainability certificate” such as BREAAM, LEAD or GPR (and meet certain additional requirements).
Abolition of property tax
As of January 1, 2023, the property tax will be abolished. The landlord tax, in short, applies to (legal) persons who own more than 50 dwellings with a monthly lease not exceeding the ceiling for social housing (2022: EUR 763.47). As of the date of this publication, the legislative proposal to abolish the landlord tax has not yet been officially published by the Dutch government.
Other measures to know
From 1 January 2023, the gift tax exemption for gifts used to, in short, finance own-use housing will be lowered. The amount exempted for 2022 is EUR 106,671. The exemption will be completely abolished as of January 1, 2024.
As of 1 January 2023, the exemption from property transfer tax for “beginners” acquiring a home for own use will be increased to EUR 440,000 (2022: EUR 400,000).
All proposed measures are subject to amendment throughout the legislative process and must be approved by the Dutch Parliament to enter into force.