End of Dutch Dividend Tax May Hurt Real Estate Investment Sector

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By Linda A. Thompson

The Dutch government’s decision to scrap the country’s dividend tax could hurt investment funds with large portfolios in Dutch real estate, practitioners told Bloomberg Tax.

The country will scrap its 15 percent withholding tax on dividend distributions from 2020 onward as part of the government’s ruling agreement. The boost for foreign shareholders of large multinational corporations that would come with ending the tax was part of the government’s motivation—but real estate investment funds are bracing for the impact of the abolition on their profits and the return on investment they have promised their shareholders.

On top of announcing the end of the tax, the center-right government warned in the ruling agreement that it would no longer allow “direct investments in real estate by investment institutions in relation to the abolition of the dividend tax.”

From 2020 onward, investment funds that own Dutch real estate will fall under the normal corporate income tax regime as a result, which they warn will dampen their profits.

Analysts at the Dutch bank ING downgraded their stock rating from hold to sell for Vastned Retail NV and from buy to hold for NSI NV, two leading Dutch property investors, in a July 2 report. “We see limited time left to lobby for a special listed regime for real estate investment trusts,” they warned.

The government’s decision to disallow fiscal investment institutions from directly investing in real estate appears to have been fueled by concerns that scrapping the dividend tax would cause returns on Dutch real estate investments to not be taxed.

In May 25 letter to the Dutch House of Representatives, State Secretary for Finance Menno Snel said the measure was necessary to “safeguard the Dutch taxing right to results from Dutch real estate.”

The government’s precise plans will only become clear in September when it will unveil its forthcoming legislative tax proposals in the 2019 Tax Plan. However, practitioners are warning that local real estate investment trusts (REITs) are already feeling the heat.

“This is putting heavy pressure on their results and their valuation. When you look at stock-listed Dutch groups, you can see that their share price is under pressure,” said Roderik Beckers, a partner at Loyens & Loeff.

Portfolio Transfers

Beckers warned July 5 that investment funds with large Dutch real estate portfolios would be confronted with a new 21 percent extra cost: the current 25 percent corporate rate will be lowered by 4 percentage points in 2021, thus skimming 21 percent from the profits they award to investors in the form of dividend distributions.

“That’s what this is bottom line - paying taxes is a cost. Real estate investment trusts will face new costs of 21 percent on their profits,” Beckers said.

He said that this lowered return on investment might cause investment funds to reduce their investment in Dutch real estate, which in turn could have ripple effects.

“We could for instance see a large transfer in portfolios. And if that happens on a large enough scale, this could of course impact Dutch real estate prices,” he said.

He added that non-listed fiscal investment funds might envisage changing their business from a company to a form that is transparent for tax purposes such as a partnership so they can continue investing in real estate.

“But stocklisted fiscal investment funds won’t be able to do this. Because they are stocklisted, they can’t adopt a new structure that is transparent for tax purposes so they are stuck,” he said.

’Highly Politicized’

Under the Dutch regime for fiscal investment institutions, REITs are subject to a zero percent corporate income tax rate provided they redistribute their profits to shareholders within eight months after the financial year in which the profits were realized.

Arianne Bonthuis-Broekman, senior associate at the NautaDutilh law firm in Amsterdam, told Bloomberg Tax that the changes would “definitely” worsen the appeal of real estate investment funds in Netherlands compared to other countries. Most EU countries have developed special regimes under which REITS are exempted from paying corporate income tax provided they redistribute their full profits to shareholders.

“The exception that makes it possible to directly invest in real estate will be gone, so that means you’ll be subject to the normal taxation regime and this will of course have an enormous impact,” she said July 5.

The changes will likely to cause local REITS with Dutch real estate to lower the amounts of their dividend distributions, she added.

Frank van Blokland, director of IVBN, said that the organization is “highly concerned about the negative effects” of the proposed new rules. IVBN is a Hague-based organization that represents institutional property investors in the Netherlands such as Delta LLoyd Vastgoed and Eurocommercial Properties. .

“The discussion around the abolition of the dividend tax unfortunately has become highly politicized,” he said in a July 5 email.

Van Blokland said that the association’s members together have investments of 17 billion euros ($19.8 billion) in REITs. The current Dutch government’s proclaimed aim of encouraging institutional investments in real estate “makes this measure very ill-considered and unwise,” he said.

To contact the reporter responsible for this story: Linda A. Thompson in Brussels at correspondents@bloomberglaw.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bloombergtax.com

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