In detail

Corporate income tax (CIT) –­­­­ Changes to the Earnings Stripping Rules (ATAD 1) for real estate investment entities

The intent is to change the Earnings Stripping Rule for real estate entities per 1 January 2025. This measure will be part of the 2025 Budget Plan.

Currently, for Dutch CIT purposes, interest deductions are limited where net borrowing costs exceed EUR 1 million or 20% of EBITDA (adjusted for tax purposes). It is now proposed to no longer apply the EUR 1 million threshold for entities holding properties that are leased out (to third parties).

As already mentioned at the time of the introduction of the Earnings Stripping Rule in 2019, the legislator announced to keep a close eye on abusive and artificial use of the EUR 1 million threshold. Now, the Dutch tax authorities acknowledge that entities holding properties more frequently make use of the EUR 1 million threshold by using separate entities to acquire the properties. As a response, it is now proposed to change the Earnings Stripping Rule for entities that hold properties that are leased out (to third parties).

PwC observation: “The proposed amendment will have significant impact on the real estate industry. For entities investing in properties that are leased out (to third parties), it will no longer be possible to use EUR 1 million threshold. Although only a brief announcement, this change may have a broad reach depending on how this change will be adopted as part of the 2025 Budget Plan (e.g., development assets with interest expenses in excess of EUR 1 million that are subsequently leased out, partially leased out properties, etc). It is expected that the overall tax burden will increase for entities that lease out properties.”

Real estate transfer tax (RETT) – Treatment of share transactions

Following the consultation issued by the Dutch Ministry of Finance (see our Real Estate Tax Services News from March 2023), it is proposed to abolish the RETT exemption for share transactions where, as per current rules, neither VAT nor RETT is due if – in short – the entity holds “new” property or a building site.

The proposed measure will be part of the 2024 Budget Plan and is expected to enter into force as from 1 January 2024. Currently, the Dutch Ministry of Finance is considering the options for transitional law. Given the administrative complexities identified with respect to such transitional law, it is also considered to postpone the effective date of the legislative change.

PwC observation: “VAT savings with respect to newly developed residential properties through share deals seems no longer possible, resulting in higher investment costs which may impact the feasibility of residential projects in a market that is already under pressure in the Netherlands. Furthermore, since the proposed legislation also results in an extra levy of RETT – compared to an asset deal – in case of share transactions related to newly developed properties in situations where the property is fully used for VAT taxed activities (i.e., no VAT savings as a result of the share transaction), it is expected that no share transactions will be carried out with respect to real estate rich entities holding newly developed properties or building land.”

RETT – Legal demerger exemption

One of the policy options is to further align the RETT legal demerger exemption with other exemptions available for Dutch RETT purposes such as the legal merger exemption and the group exemption.

PwC observation: “Following various rulings from (supreme) courts in relation to the application and scope of the legal demerger exemption, it is now proposed to further align and tighten the conditions of the demerger exemption, only facilitating demergers with genuine enterprises (active businesses), and also prohibiting a disposal of entities following an exempt demerger.”

Allowance percentage EIA lowered

As from 2024, the allowance percentage of the Energy Investment Allowance (EIA) and the maximum investment amount will be lowered due to the EIA budget deficit in 2022.

PwC observation: “With the lower allowance percentage and investment amount for the EIA, a reduced tax benefit is available for taxpayers making qualifying investments. Given the ESG agenda of the various property owners, we do not expect that this measure has an immediate impact on contemplated investments.”

VAT adjustment rules ‘refurbishing services’

Currently, VAT adjustment rules apply to capital goods. As such, movable assets are followed approx. five years and immovable assets approx. ten years. During this VAT revision period, a change in use of that property could result in a payable or receivable VAT amount. No VAT adjustment rules apply to services. If an immovable property is extensively refurbished, the VAT recovery right is in principle final at the end of the financial year in which the refurbishment took place. Following the Dutch Ministry of Finance this could result in undesirable tax planning.

The Dutch Ministry of Finance is considering extending the scope of the VAT adjustment rules to (expensive) refurbishing services. Draft legislation is possibly submitted for consultation later.

PwC observation: “If this policy option is implemented, the VAT use of a refurbished property after the first financial year will be relevant. However, it is still unclear which refurbishing services specifically will be covered by the extended VAT adjustment rules. In any case, extending the VAT adjustment rules could lead to an additional administrative burden.”

1 It is noted that the Spring Memorandum 2023 includes further announcements related to tax measures such as personal income taxation in box 3, business succession facilities, dividend stripping, VAT, etc. which have not been addressed in this newsalert.