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Traditionally on the third Tuesday of September, the Dutch government proposes its Tax Plan (Belastingplan) and other important tax measures for the coming years to the Parliament. This Tax Alert will highlight the proposals which are relevant to national and international real estate investors.
On Budget Day 2019 it was announced that per 2021, the upper corporate income tax rate would be reduced to 21.7% whereas the lower would decrease to 15.0%. On Budget Day 2020, the government reversed a part of this plan. In accordance with the previous plan, the lower corporate income tax rate will be reduced to 15.0% in 2021, but the higher corporate income tax rate will remain 25.0%. Simultaneously, it was announced that the bracket of the lower corporate income tax rate will be increased to profits up to and including € 245.000. This will already be implemented in 2021. According to the Budget Day proposal, the first bracket will be even further increased in 2022 to profits up to and including € 395.000.
Residential real estate
The Real Estate Transfer Tax (RETT) rates and system will change as per 1 January 2021. Firstly, the default RETT rate will increase from 6% to 8%. Secondly, the lower 2% rate for residential real estate will only apply to natural persons who use the house or apartment as a their main residence. Investors acquiring residential real estate will fall in the higher 8% RETT bracket. The latter means an increase of 6% from the current 2% to 8% per January 1, 2021.
Furthermore, people between ages 18-35 can qualify for a RETT exemption when buying a house to live there themselves. This exemption can only be applied once per person. The exemption will not affect investors directly but it may affect pricing of housing in that part of the housing market.
Non-residential real estate
With a default RETT rate set at 8% per January 1, 2021, investors acquiring non-residential real estate will fall in the higher 8% RETT bracket. The latter means an increase of 2% from the current 6% to 8% per January 1, 2021.
The increased rates and market changes put pressure on closing real estate deals before the end of 2020.
Note the amendment in RETT rates and the exemption must still be approved by the Dutch parliament. The amendment is not part of the Tax Plan 2021 but is arranged in a separate bill.
No transitional arrangements have been made for the rate increase of the RETT. The RETT rate increase puts pressure on Dutch real estate deals that were initially contemplated in 2021 to close them before the end of 2020. If this is not possible with current transactions, alternative transfer methods can be considered, such as:
Transfer using condition subsequent
It may occur that a contemplated acquisition in 2021 cannot be brought forward to 2020 due to - for instance - an immediate lack of funds. In that case, one could consider concluding the purchase agreement subject to a condition subsequent in 2020. When the condition subsequent is met (the funding of the investment) in 2021, the 2020 acquisition is completed. By doing so the RETT rates of 2020 are applicable (2% or 6% depending on the kind of acquisition).
Acquiring legal ownership
Like above, if funds are not readily available it could be considered to acquire the sole legal ownership of the real estate for EUR 1 (only when certain conditions are met) in 2020. Funding of the economic ownership can then be postponed to a later date in 2021. The acquisition of the legal ownership in 2020 is taxed at 2% or 6% (depending on the kind of acquisition) taking into account the fair market value of the real estate.
The subsequent acquisition of the economic ownership should be tax exempt for RETT purposes unless the real estate has increased in value in the period between the two transactions. Then RETT will also become due on the subsequent acquisition of the economic ownership for the increase in value of the real estate.
Acquiring economic ownership
If the acquisition of the legal ownership of the real estate cannot be brought forward one may consider another option. For example to acquire the real estate’s economic ownership in 2020, whereby the legal ownership is subsequently acquired in 2021. The acquisition of the economic ownership is then taxed at 2% or 6% (depending on the kind of acquisition).
The subsequent acquisition of the legal ownership should be tax exempt for RETT purposes unless the real estate has increased in value in the period between the two transactions. Then RETT will also become due on the subsequent acquisition of the legal ownership for the increase in value of the real estate.
With these future tax amendments ahead, tax planning could be beneficial.
