Expired concurrent transfer tax exemption
On February 27, 2023, the draft Real Estate Equity Transactions Bill was released for consultation (see HERE). The bill includes an adjustment whereby the transfer tax exemption due to concurrence with VAT can no longer be invoked (as of 1-1-2024) if that acquisition is the result of a share transaction.
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Back to basics for a moment
The supply of new immovable property is subject to VAT, an exemption from transfer tax applies in this regard due to concurrence. The supply of shares is exempt from VAT.
If the company's real estate assets consist of new real estate, the acquisition of these shares is also exempt from transfer tax because of concurrence. This double exemption of VAT and transfer tax is considered by the legislator to be contrary to the intent of both taxes.
The draft bill highlights the situation where the shares in an OZR (real estate legal entity) are sold. The sole (or most important) activity of this company consists of owning an immovable property that is operated by renting to third parties (e.g., landlords of housing) or by its own use (e.g., operators of solar panel parks).
Clearly, the system chosen in the proposal can be considered a punitive tax. Because transfer tax is levied on new immovable property that is transferred indirectly (as shares) this outcome compares poorly with the consequences if the same immovable property had been delivered directly (as bricks) because then no transfer tax is due by applying the concurrence exemption. However, the legislator considers this a desirable adjustment because the VAT burden on a share transaction is lower than the VAT burden on a VATable delivery of the immovable property itself and the possibilities to "fix" this in the VATsystem are, in its view, too complex.
Impact
For developers and investors acquiring new real estate that is operated on a VAT-exempt basis, so that no right to deduct VAT can be exercised, a share transaction can still result in significant VAT savings. That savings would be reduced by the amount of sales tax levied as of Jan. 1, 2024.
For project developers and investors acquiring new real estate that is operated subject to VAT so that a right to deduct VAT can be exercised, a share transaction will result in a higher tax burden because transfer tax would henceforth be levied. These parties are more or less forced to acquire new buildings no longer indirectly but directly so that the acquisition is exempt from transfer tax.
Alternatives
There are conceivable alternatives that are also mentioned in the explanatory memorandum to the bill. For example, the integration tax could be reintroduced as a separate taxable event (Article 18, a (and b) of the EU VAT Directive) or the Netherlands could make use of the possibility to designate shares as tangible property for VAT purposes (Article 15(2) EU VAT Directive), so that shares would be treated as the tangible property in the VAT system.
The latter method leads to all sorts of side effects that are undesirable.
The former charge best fits the problem assumed by the legislature. However, the legislator does not wish to use this possibility because of its complex implementation. If one looks back to the practice in the Netherlands in which the integration supply was applicable (until January 1, 2014), the implementation of this integration supply is not so bad, however.
Webinar March 9, 2023
Want to know more about this issue? We are hosting a Webinar on this issue on Thursday, March 9, 4:00 p.m..
You can register via this LINK.
Paul Cramer is a VAT partner at Less Grey, specializing in indirect taxes.
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