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Maarten J.C. Merkus and Bastiaan L. de Kroon
KPMG Meijburg & Co Tax Lawyers, Amsterdam
FP is a nonresident alien individual who is interested in investing in Host Country real estate either directly or through a foreign corporation. FP may (1) acquire raw land or undeveloped real estate for investment; (2) acquire developed rental properties; (3) engage in Host Country real estate construction or development activities; or (4) acquire Host Country property for personal use.
FP is also contemplating using a Host Country corporation or pass-through entity to conduct the above-referenced activities.
1. What are the Host Country tax consequences of any gains from the sale of Host Country real estate?
2. What are the Host Country income tax consequences to FP of income derived from the real estate in Host Country?
3. What are the Host Country income tax differences from carrying out such activities through an entity?
4. How will the Host Country tax consequences be affected by a treaty between the Host Country and FP's country of residence?
The Dutch Personal Income Tax Act 2001 (“PITA”) and the Corporate Income Tax Act 1969 (“CITA”) identify two types of taxpayers: resident taxpayers and non-resident taxpayers. Resident taxpayers are those individuals/companies who are resident in the Netherlands and are taxed on their worldwide income. Non-resident taxpayers are individuals/companies who are resident outside the Netherlands and earn “Dutch-source income.”
For individuals Dutch-source income is defined in Chapter 7 of PITA. Dutch source income includes, among others (as far as relevant for this contribution):
Dutch source business profits and profits from “other activities” are taxed at progressive rates with the maximum rate being 52 percent. Income from a substantial interest is taxed at 25 percent. Deemed yield income is taxed at 30 percent, resulting in an effective tax rate of 1.2 percent of net value of the property.
Under PITA the tax consequences of an investment in Dutch property depend on the nature of the investment (active vs. passive). Dutch property that is held by a non-resident individual as part of “a business” (Articles 7.2.2.a and 7.2.6 PITA) or in the course of “other activities” (Article 7.2.2.c PITA) is taxed in the Netherlands under the “profit regime”; all profits from the property, including rental income and capital gains, are taxed at progressive rates with the maximum rate being 52 percent. Dutch property that is held by a non-resident individual as passive investment (Articles 7.7.1 and 7.7.2.a PITA) is taxed in the Netherlands under the “deemed yield regime”; a deemed yield of 4 percent is taxed at 30 percent actual income (rental income and capital gains) is irrelevant.
PITA does not define a “business” (Articles 7.2.2.a and 7.2.6 PITA). The predominant perception is that a business is a durable organisation of labour and capital that takes part in economic life with the intention of generating profit. The intention of generating profit is an objective requirement: it is decisive that profit can reasonably be expected.
Paragraph 3.4.1 (Articles 3.91 through 3.93) PITA provides definitions on the scope of “other activities” (Article 7.2.2.c PITA). Article 3.91.1.c PITA contains an important description of “other activities”: “other activities” includes an investor making net-wealth profitable in a way that goes beyond normal net-wealth management, for instance the splitting and selling of property, significant maintenance or adjustments to an asset carried out by the investor self, or the employment by the investor of foreknowledge or comparable specific knowledge.
The distinction between a “business” and “other activities” in practice is often difficult to make. In theory, the main difference is that “other activities” do not have to be durable where this is a criterion for recognising a “business.” Both sources result in profits that are taxed at progressive rates. The distinction is primarily relevant for access to certain tax facilities, which apply only to a business/business profits.
There is a lot of, very factual, Dutch case law on the distinction between “business and other activities,” i.e., active investment, and normal net-wealth management, i.e., passive investment.2 Although the distinction is not always clear, mainly caused by the factual nature of the situations, from this case law it can be concluded that the following criteria are of primary relevance: the amount of labour of the investor, the organisation and volume of the activities, the existence of specific (fore)knowledge/expertise, the funding (proportion of equity and debt), the level of risk that is taken and the return that is made or is pursued. Generally speaking, the more labour and expertise an investor puts into an investment, the higher the likelihood that the investment activities are considered to be beyond normal net-wealth management. Relevant is that the employment of (fore)knowledge and the labour activities actually influence the return on the investment (e.g. by achieving a low acquisition price due to specific foreknowledge or by creating a better market position of the investment by significant labour) and that, in case of a profit, this profit could have been reasonably expected.
If applied to the situation of FP and the given options of property investment, the following can be noted.
The mere speculative holding of undeveloped land by FP should generally be considered normal net-wealth management and thus taxed under the “deemed yield regime” of Articles 7.7.1 and 7.7.2.a PITA. Under this regime a capital gain upon the sale of the land will not be taxed separately.If the land were acquired as part of an existing business of FP or with the aim of selling it at a profit within a short timeframe and that profit can be reasonably expected due to specific (fore)knowledge or substantial labour of FP, FP should generally be taxed under the “profit regime,” either on the basis of Article 7.2.2.a, Article 7.2.2.c or Article 7.2.6 PITA. In that case a capital gain upon the sale of the land will be taxed at progressive rates, as part of the total profits of the investment.
If the properties are part of an existing business of FP or if the activities of FP go beyond those of a passive investor and FP's activities result in an increased return on investment (for instance FP is actively involved in the refurbishment of the properties and negotiates an increase of rent with the tenants) the rental properties should generally fall within the “profit regime,” on the basis of Article 7.2.6 PITA respectively Articles 7.2.2.a or 7.2.2.c. PITA. Capital gains on the properties will then be subject to Dutch individual income tax as part of the total profits of the investment.
If FP is a genuine passive investor, e.g., who employs the services of third parties to collect the rental income from the tenants, renegotiate lease agreements, find new tenants, and to maintain the properties, the rental properties in principle should be taxed under the “deemed yield regime” of Articles 7.7.1 and 7.7.2.a PITA. The actual income from the rental properties will then be irrelevant.
The development activities will constitute a business and thus be taxed on the basis of Article 7.2.2.a PITA; a capital gain realised by FP will be taxed at progressive rates ( the maximum rate being 52 percent).
A Dutch property held by FP for own use will likely be taxed on the basis of a deemed yield of 4 percent at a rate of 30 percent, based on Articles 7.7.1 and 7.7.2.a PITA.3 This results in an effective tax rate of 1.2 percent of the net value of the property.
For companies the definition of Dutch source income can be found in Chapter 3 of CITA. Dutch-source income includes, among others (as far as relevant for this contribution):
Foreign companies with Dutch source income are in principle taxed at a rate of 25 percent on their taxable profit.5 Contrary to PITA, CITA does not have different statutory rates for different types of income. As a sole exception, a 15 percent rate is applied when a non-resident company is taxed on the basis of owning a substantial interest in a Dutch company, because of the absence of a business and the presence of the intention to avoid solely Dutch dividend withholding tax, i.e., not Dutch personal income tax (Article 17.5 CITA).
A non-resident company owning Dutch property will be taxed on the profits from that property, including rental income and capital gains, on the basis of Articles 17.3.a and 17a.a CITA. Unlike for individual investors, for corporate investors the nature of the property investment – active vs. passive – is irrelevant.
A Dutch property investment could by structured via a Dutch entity owning the property. This may be a company or a partnership.
A typical Dutch company for investment and business structures is a limited liability company, in Dutch a “besloten vennootschap” or “BV.” A Dutch BV will be taxable in the Netherlands on its worldwide profit. A Dutch BV owning Dutch property will be subject to 25 percent6 corporate income tax on the taxable profits from that property, i.e., after deduction of allowable expenses.
Based on the Dutch Dividend Withholding Tax Act 1965 (DWTA) as a main rule profit distributions made by a Dutch BV to non-resident shareholders are subject to 15 percent Dutch dividend withholding tax, to be withheld by the BV. An exemption applies where the shareholder is a qualifying EU/EEA entity and owns a qualifying shareholding in the BV.
For the sake of completeness, we note that Article 28 CITA contains a special regime for “fiscal investment institutions,” similar to REITs in other jurisdictions. Fiscal investment institutions are subject to 0 percent corporate income tax. This 0 percent regime is subject to various requirements, regarding the legal form, the activities (must be passive), the shareholders and the funding, which will likely not (all) be met in the given base case scenario. For the purpose of this contribution we will therefore assume a typical Dutch limited liability company, i.e. a BV.
In the Netherlands the typical partnership forms are the general partnership, in Dutch “vennootschap onder firma” or “VOF,” and the limited partnership, in Dutch a “commanditaire vennootschap” or “CV.”
A VOF is a straightforward partnership whereby the partners, for joint and separate account, conduct a business under the partnership's name. All partners of the VOF are liable for the debts of the VOF.
A CV is a special type of VOF. The CV is a partnership between limited and general partners. The business of the CV is conducted by the general partners, the limited partners provide the required funding. The general partners are fully liable for the CV debts whereas the limited partners can be held liable only up to the amount of their equity invested in the CV. A VOF is transparent for Dutch income tax purposes, meaning that the VOF itself is not liable to corporate income tax but, instead, the partners of the VOF are taxed on the profits of the VOF.
A CV is transparent for Dutch income tax purposes if it qualifies as a “closed” CV (as opposed to an opaque “open” CV). A CV is considered “closed” if the accession and replacement of limited partners in the CV is subject to the consent of all partners, general and limited.
The Dutch tax position of an “open” CV will in principle be similar to that of a Dutch limited company, i.e., it will be subject to 25 percent Dutch corporate income tax on its worldwide profit and profit distributions will generally be taxed with 15 percent Dutch dividend withholding tax.
For the purpose of this contribution we will assume a transparent Dutch partnership.
A non-resident individual owning a substantial shareholding in a Dutch BV will be taxed with 25 percent Dutch individual income tax on income, including dividends and capital gains, from that shareholding, only if this shareholding cannot be allocated to a business carried on by the individual shareholder (Articles 7.1.b and 7.5.1 PITA). A substantial shareholding exists if a taxpayer owns, alone or together with spouse or partner, directly or indirectly, 5 percent or more of a particular class of shares of the paid-up share capital of a company with a capital divided into shares. A taxpayer also qualifies as a substantial shareholder if he, together with his partner or alone, owns rights to obtain (in)directly at least 5 percent of a class of shares in the subscribed capital, profit-sharing certificates, which entitle to 5 percent of the year profit, a call option on 5 percent of the nominal, issued capital or 5 percent of the liquidation surplus in a resident or non-resident company. In addition, a substantial shareholding exists if a shareholder (in)directly owns at least 5 percent of the voting rights in the general meeting of shareholders (Articles 4.6 and 4.7 PITA).
If FP invests in Dutch property via a Dutch BV, he will become liable to Dutch income tax on his shareholding in the Dutch BV provided his shareholding cannot be allocated to a business activity. In case of a dividend distribution by the Dutch BV, FP will be taxed on that income at 25 percent. FP will be allowed to credit the 15 percent Dutch dividend withholding tax that is withheld by the Dutch BV on the dividend.
If FP invests in Dutch property through a transparent Dutch partnership, the Dutch tax position of FP will be the same as if FP were to invest in the Dutch property directly. For the tax consequences of FP directly owning Dutch property we refer to Chapter I of this contribution.
A non-resident company owning a substantial shareholding in a Dutch BV will be taxed with 25 percent7 Dutch corporate income tax on income, including dividends and capital gains, from that shareholding, if this substantial interest cannot be allocated to a business carried on by the non-resident company and if the main purpose or one of the main purposes for the non-resident corporate shareholder of holding the substantial interest is to avoid the levying of Dutch personal income tax or Dutch dividend tax from another person or company (Article 17.3.b CITA).
If FP would invest in a Dutch BV via a foreign company owned by FP, this foreign company could become subject to Dutch corporate income tax on his shareholding in the Dutch BV, but only if the foreign company does not carry on a business to which it can allocate the Dutch shareholding and interposing the foreign company was mainly meant to avoid the levying of Dutch personal income tax or Dutch dividend withholding tax from FP. The foreign company would be allowed to credit a 15 percent Dutch dividend withholding tax charge on dividend income against a Dutch corporate income tax liability on that income.
If a foreign company owned by FP invests in Dutch property through a transparent Dutch partnership, the Dutch tax position of that foreign company will be the same as if it were to invest in the Dutch property directly. For the tax consequences of a non-resident company directly owning Dutch property we refer to Chapter II of this contribution.
Generally, all tax treaties that the Netherlands have concluded with other countries are based on the OECD Model Tax Convention on Income and on Capital. In line with Articles 6 (Income from immovable property) and 13 (Capital Gains) of the Model Tax Convention, the Dutch tax treaties typically allow the Netherlands to tax income and capital gains from Dutch property. Therefore, the Dutch tax treatment of direct ownership of Dutch property by FP or a foreign company owned by FP as described in Chapters I and II of this contribution should not be affected by an applicable tax treaty. The same should apply if the Dutch property investment were made via a transparent Dutch partnership.
Based on the DWTA, dividend distributions made by a Dutch BV are generally taxed with 15 percent Dutch dividend withholding tax. In case of non-resident shareholders, these profit distributions may under certain circumstances be subject to Dutch individual or corporate income tax at the level of the foreign shareholders, see Chapters III.B and III.C above.
Under most tax treaties the Netherlands are allowed to levy tax on profit distributions by resident companies to shareholders, only at reduced rates. For individual shareholders this reduced rate typically is 15 percent but for foreign corporate shareholders with a certain minimum shareholding the rate may be lower, in many treaties even reduced to nil.
An applicable tax treaty can affect the Dutch tax position of FP or a non-resident company owned by FP as described in Chapters III.B and III.C in the way that the Netherlands will only be allowed to tax profit distributions made by the Dutch BV at the maximum rates as agreed in the dividend article in that tax treaty (the maximum treaty rate applying to both Dutch personal or corporate income tax as well as dividend withholding tax).
As described in Chapters III.B and III.C of this country response FP or a foreign company owned by FP can under circumstances be liable to Dutch personal or corporate income tax on capital gains on a disposal of shares in a Dutch BV owning Dutch property.
Most Dutch tax treaties include a capital gains article in line with Article 13 of the OECD Model Tax Convention, with the following main exceptions:
Under a relevant tax treaty the Netherlands would generally not be allowed to tax a capital gain upon a disposal of the shares in the capital of the Dutch company by FP or by a foreign company owned by FP. This would be different only if FP were the seller of those shares and FP has been resident in the Netherlands in the ten or five years preceding the disposal of the shares of the Dutch company. Additionally, under some treaties FP still has to be a national of the Netherlands without being a national of the country of immigration.
1 In Dutch “overige werkzaamheden.”
2 e.g., Dutch Supreme Court (SC) Jan. 16, 1985, nr 22753, and SC July 8, 1998, nr 33310, on specific (fore)knowledge/expertise of investors; SC Apr. 29, 1959, nr 13844, and SC Mar. 9, 1988, nr 25216, on the amount of labour performed by investors.
3 In theory the possibility exists that the Dutch property is taxed under the regime for owner occupied dwellings (in Dutch “eigen woning”) on the basis of Article 7.2.2.f PITA, which prescribes the recognition of a deemed income (in Dutch “forfait”) to be taxable at progressive rates. However, for non-residents it is highly unlikely that a Dutch property is used by them as their main residence, as this would typically result in Dutch residency for tax purposes.
4 Article 17a CITA gives the definition of “a business carried on in the Netherlands”; Dutch property is deemed to be (part of) a business carried on in the Netherlands.
5 However, the first EUR 200,000 of taxable profit is taxed at 20 percent.
6 See footnote 5.
7 However, see footnote 5.
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