Dutch Budget Day 2022: Tax Measures Relevant for Real Estate Funds | Alvarez & Marsal | Management Consulting
On Dutch Budget Day 2022 (ie, 20 September 2022), several tax measures were announced which may impact real estate funds investing in or via the Netherlands. The announced abolishment of the Dutch REIT regime is a bit of a surprise. Other than that, there are no real surprises, as most measures were already pre-announced or leaked. The most notable measures are the increase in the real estate transfer tax rate to 10.4%, lowering the VAT rate on residential solar panels to 0% and certain changes to the Dutch corporate income tax rate structure. There are also measures that are relevant in light of carried interests and management incentive plans. If you would like to know more or discuss the implications, please feel free to get in touch with your usual A&M adviser, Roel de Vries or Nick Crama.
Abolishment 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 1 January 2024. The Dutch REIT regime is also referred to as the Dutch fiscal investment institution (FBI) regime for real estate investments. The legislative proposal to formalize the abolishment will be published on Budget Day 2023. As a result of the abolishment, existing FBI entities will in principle become subject to standard Dutch corporate income tax at a headline rate of 25.8%. An FBI would still be allowed to own shares in taxable subsidiaries that directly invest in Dutch or foreign real estate. The Ministry of Finance is investigating whether additional tax measures will be introduced to facilitate existing FBI entities that want to restructure out of the FBI regime (eg, as certain restructurings could trigger Dutch real estate transfer tax).
The Dutch FBI regime is a corporate income tax facility that can be applied by listed and non-listed, regulated and unregulated, (real estate) investment entities. The facility is broader than real estate investments and can, 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 after the end of each fiscal year. Such distributions are in principle subject to 15% Dutch dividend withholding tax. Capital gains can, subject to certain formalities, be distributed free from Dutch dividend withholding tax. This means that an FBI entity investing in real estate is effectively subject to 15% taxation over, shortly put, its net rental income.
In 2018, the Dutch State Secretary of Finance first announced an investigation to assess whether the FBI regime for real estate investments can be amended. The reason for this investigation was that the FBI regime can lead to ‘tax leaks’, as effectively zero taxation over income derived from Dutch real estate investments is possible for certain foreign investors. This can, for example, be achieved when foreign investors in an FBI entity apply dividend withholding tax exemptions under double tax treaties concluded by the Netherlands or when foreign investors themselves claim the FBI status when directly holding Dutch real estate investments.
The results of the evaluation of the FBI regime were published on June 30, 2022. The investigative committee concluded that the proposed solution of abolishing the FBI regime for real estate investments was disproportionate. Alternative solutions were presented.
Increase real estate transfer tax rate for investment property to 10.4%
Effective 1 January 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%. Real estate transfer tax is levied from the acquirer. To still benefit from the 8% rate, transfers should be executed before 1 January 2023. A conditional transfer by means of a so-called ‘Groninger deed’ can provide for a solution when a commercial purchase agreement can be reached before 1 January 2023, but the purchaser is only able to fund the purchase price in 2023.
Lowering of VAT rate on residential solar panels to 0%
Effective 1 January 2023, the VAT rate on the supply and installation of solar panels on or in the immediate vicinity of residential real estate will be lowered from 21% to 0%. This is particularly relevant for investors in residential real estate that cannot (fully) recover VAT.
Increase of the 15% corporate income tax rate to 19% and reduction of the first bracket
Effective 1 January 2023, the lower Dutch corporate income tax rate 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 bracket will also be lowered from EUR 395,000 to EUR 200,000. As a result, Dutch corporate taxpayers will sooner be subject to the 25.8% corporate income tax rate. The 25.8% rate will namely apply to all taxable income that exceeds the first bracket of EUR 200,000.
Limitation of the 30% facility to the maximum public sector salary
Effective 1 January 2024, the tax-free allowance for payroll tax purposes equivalent to 30% of the gross salary of qualifying expats will be capped. The cap will be implemented by limiting the salary that can benefit from the allowance. The limit will be the maximum salary for 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% ruling and can be obtained by highly skilled migrants moving to the Netherlands for a specific employment role.
Progressive personal income tax rates for income from substantial interests (Box 2)
Effective 1 January 2024, the substantial interest regime for Dutch personal income tax purposes will include two brackets with progressive rates: taxable income up to EUR 67,000 will be subject to 24.5% and all excess taxable income will be subject to EUR 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 they receive distributions or realize capital gains (or losses) on their substantial interests. Substantial interests are, broadly, interests held in entities of 5% or more. This amendment is relevant for management equity / incentive plans and carried interest participations that are commonly subject to the substantial interest regime.
Amendments to personal income taxation of savings and investments (Box 3)
Personal income taxation of savings and investments is currently based on a deemed return mechanism. Due to a decision from the Dutch Supreme Court ruling that taxation based on a deemed return conflicts with the European Convention on Human Rights, legislation is proposed to offer repairs for the past and adjust the regime going forward. The regime will be adjusted for the years 2023, 2024 and 2025. In addition, the tax rate for income from savings and investments will be increased with 1% per annum from the current 31% to 34% in 2025. Effective 1 January 2023, the tax-free base per person will be increased from EUR 50,650 to EUR 57,000. As of 1 January 2026, it is expected that savings and investments will be taxed based on actual income less expenses, including (un)realized capital gains and losses. It has been announced that fair value movements of Dutch real estate will initially still be based on a deemed return mechanism, before transitioning into taxation based on actual fair value movements. These developments should all 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 environmental investment facility (MIA) will be increased to EUR 249 million and EUR 194 million, respectively. These budgets are not yet final. The budget for the depreciation facility on environmental investments (Vamil) will remain EUR 25 million. Once the budgets run out for 2023, the facilities are no longer accessible. EIA, MIA and Vamil applications should therefore be filed as early in the year as possible. The EIA targets energy-saving and renewable energy investments, which for real estate typically concern heating, cooling, LED lighting, ventilation and/or air conditioning. The most significant real estate investments possibly qualifying for the MIA are circular utility buildings that have a ‘sustainability certificate’ such as BREAAM, LEAD or GPR (and meet certain additional requirements).
Abolishment of the landlord levy
Effective 1 January 2023, the landlord levy will be abolished. The landlord levy, shortly put, applies to (legal) persons owning more than 50 residential properties with a monthly lease not exceeding the social housing limit (2022: EUR 763.47). Per the date of this publication, the legislative proposal to abolish the landlord Levy has not yet been formally published by the Dutch government.
Other measures to be aware of
Effective 1 January 2023, the gift tax exemption for gifts used to, shortly put, finance residential property for own use will be lowered. The exempt amount for 2022 is EUR 106,671. The exemption will be completely abolished effective 1 January 2024.
Effective 1 January 2023, the real estate transfer tax exemption for ‘starters’ purchasing residential property for own use will be increased to EUR 440,000 (2022: EUR 400,000).
All proposed measures may be subject to amendments throughout the legislative process and need to be approved by the Dutch Parliament to become effective.