Proposed revision of Dutch RETT scheme share deal for real estate acquisitions
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The Dutch legislator is considering changing the Dutch RETT (real estate transfer tax) scheme regarding acquisitions of Dutch real estate via share deals. If this change is indeed implemented, then effective 1 January 2024, the current RETT exemption on the acquisition of shares in a real estate entity holding newly developed real estate would cease to exist.
What would this mean in practice for investors?
Currently, asset deals regarding newly developed real estate are subject to VAT (21%). As a result, during the two years after the asset is taken into first use, an exemption for RETT (10,4%) exists if the buyer is not eligible to deduct the VAT. Without this exemption, the tax burden would be 31,4% (21% VAT + 10,4% RETT). By applying the exemption, this is reduced to 21% non-deductible VAT.
This scheme is particularly relevant in the case of residential real estate (and in some other scenarios not covered in this post). In the case of the acquisition of leased residential real estate, the buyer is not eligible to deduct the VAT on acquisition and operational costs and - under the current RETT scheme - would be able to invoke the RETT exemption. However, for the acquisition of leased commercial real estate, the buyer will in most cases be eligible to deduct the VAT, and therefore, not be entitled to the RETT exemption if transfer would occur more than six months after the asset is taken into first use. As a result, (after deduction of the 21% VAT) the tax burden in that case is 10,4% RETT.
Back to the proposed revision of the tax scheme: What is the relevance in practice?
As explained above, buying new residential real estate that is leased out, via an asset deal, incurs a tax burden of 21% non-deductible VAT and qualifies for an exemption for RETT (10,4%), so an overall burden of 21%.
Currently, if the same asset (i.e., new residential real estate that is leased out) is not acquired via an asset deal but via share deal, the tax burden is zero (subject to the VAT on acquisition costs, which are not deductible for the special purpose vehicle) because the acquisition of shares is exempt from VAT. The buyer of shares saves 21% non-deductible VAT on the acquisition. And like in the asset deal variant, no RETT is due. So, in total, the tax burden for the buyer on the residential asset deal is 21% higher than the tax burden on the same acquisition via a share deal.
That would change pursuant to the envisaged revision of the RETT scheme. The revision would introduce a RETT levy (10,4%) on the acquisition of new (residential) real estate via a share deal.
If this new scheme is adopted, per 1 January 2024, the acquisition of new (residential) real estate via a share deal would become 10,4% more expensive.
Investor and developer considerations
Investors looking to buy new residential real estate, and developers selling residential real estate, should consider signing the SPA and transferring the shares in the real estate entity holding the newly developed real estate before 1 January 2024.
This means December 2023 likely will be a busy time, just like December 2022 when buyers and sellers wanted to transfer ownership of real estate subject to the old RETT rate of 8% before the new 10,4% RETT rate came into effect on 1 January 2023.
What will happen after 31 December 2023?
If the new scheme is adopted, after 31 December 2023, acquisition costs would go up 10,4%, potentially putting pressure on the value of residential development projects.
What other effect would this have?
Developers would have to adjust the valuations of their projects if transfer is expected after 31 December 2023, which might lead to breaches of loan covenants with their financiers.
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