To give you something that can help you prepare for the new year, below we provide you with a selection of decisions by tax courts, published in the third and fourth quarters of 2021, that we believe are of interest to the real estate sector.
The supply of Dutch real estate (i.e. the transfer of legal ownership or economic ownership) is in principle VAT-exempt. There are three exceptions to this rule, one of which is the transfer of “building land.” Building land is defined in Dutch tax law as undeveloped land apparently intended to be built on with one or more buildings/structures.
In the case at hand, a seller sold a plot of land to a developer of residential properties. A factory used to sit on this plot of land but had been demolished. The only remaining part of the factory was a wall standing approximately 96 meters long and 2.4 meter high. The wall would serve as a separation and outer wall for garage boxes, still to be developed.
The real estate developer and the seller took the position that the supply of the plot of land was not building land since there was a 96-meter-long wall on it. The Dutch tax authorities, however, disagreed and claimed that the wall was “negligible” and that the plot of land should be qualified as building land, and that therefore the supply of land was VAT taxable.
In appeal, the Court of Appeal considered that partial demolition of an existing building does not in itself lead to the creation of “undeveloped land” or “building land.” In order to supply building land – for VAT purposes – at the time of supply there must be a parcel of undeveloped land on which, with a view to construction, certain actions have taken place. Land on which there is a partly demolished building or on which there is still (a) construction(s) – or example a basement, foundations, walls or remnants thereof, such as the wall on the plot in this case – still constitutes land with a construction on it (and therefore not building land) for VAT purposes.
The building of the former factory had not been completely demolished. The wall and a series of foundation pillars were deliberately not removed, but left in place, as they were considered to be of use for the newly built buildings. The wall still possessed the function of a ground barrier, preventing the topsoil of the plot from washing away into the lower adjacent land. This made the wall essentially subservient to the plot: the plot cannot exist without the wall, and the wall, as a structure inextricably linked to the plot and the lower lying terrain, is by no means negligible. The Court of Appeal therefore agreed with the position taken by the real estate developer and the seller that the supply was not taxed with VAT.
Court of Appeal (Gerechtshof) Den Haag, April 29, 2021, ECLI:NL:GHDHA:2021:1236
Whether or not a transfer of real estate properties was considered a supply of building land was also a point of discussion in another court case in Q4 of 2021.
This case concerned a municipality that wanted to sell a former recreational park that was used as an “asylum-seeker center” to a housing foundation, which would demolish the existing buildings and turn them into plots that could be used for housing in order to sell them on to end users. During these activities the ECJ handed down the Don Bosco judgment1, which meant that – following the ruling of the ECJ – the housing association was considered to supply the buyers with building land that was subject to VAT, while the housing association also had to pay real estate transfer tax on the acquisition of the land. To avoid this accumulation of tax the parties, as far as still possible, refrained from supplying via the housing association, and the municipality delivered the plots directly to the end users.
The tax authorities argued that this course of events should not change the original outcome, i.e. that there is a delivery of building land to the end buyers, but now by the municipality itself. In short, the Dutch tax authorities argued that (a) building land was supplied to the end users, (b) that based on the Don Bosco case law, parties intended to supply building land and (c) that the municipality abused the law by structuring the acquisitions of the properties in the most beneficial way.
The District Court first ruled that the remaining foundations, concrete floors and the sewerage works could still be considered a building, and therefore this could not be considered a supply of building land. Secondly, the District Court ruled that parties always intended to transfer buildings and not building land, also taking into account that it was the housing foundation ordered that ordered the buildings demolished, not the municipality. Finally, the District Court ruled that there was no abuse of law. The direct supply to the end users fits within the liberty that taxpayers have to structure a transaction in the most tax-efficient way.
District Court (Rechtbank) Gelderland, November 1, 2021, ECLI:NL:RBGEL:2021:5803
The acquisition of real estate properties by means of a legal merger is a taxable event for real estate transfer tax purposes. An exemption is available if certain conditions are met. These conditions include that the legal merger is based on sound business reasons. The parliamentary history relating to these rules provides an indication as to which criteria should be met in order for a merger to be considered to be based on sound business reasons:
In the case at hand, A holds the shares in two companies, Company X and Company Q. The activities of these companies consist of executing a pension plan for A. Furthermore, X and Q jointly own a residential property. The other assets of Q consist almost entirely of receivables and cash. In addition to the residential property,
X also owns receivables and cash and another immovable property. Furthermore, income is received from intellectual property rights. In mid-2016, a legal merger takes place, in which Q is the disappearing legal entity and X is the surviving legal entity. In connection with the acquisition of ownership of the other half of the residential property, X pays real estate transfer tax of € 3000. X subsequently argues that no transfer tax is due because the legal merger is primarily based on sound business reasons and should therefore be exempt. The inspector disagrees.
The Amsterdam Court of Appeal ruled that the exemption from real estate transfer tax applies to the acquisition of the share in the residential property in the context of the legal merger between X and Q. According to the Court, X made it plausible that the merger was primarily based on sound business reasons. Both companies were engaged in the administration of a pension plan prior to the merger and both also invested assets in real estate, receivables and liquid assets. Furthermore, there are also other activities, as income is enjoyed from intellectual property rights. With regard to the activities, a significant cost reduction takes place. The fact that the synergy effects were not spectacular and no substantial economies of scale are achieved was not considered important by the Court, since X and Q only carry out limited activities.
Court of Appeal (Gerechtshof) Amsterdam, April 22, 2021, ECLI:NL:GHAMS:2021:2143.
The acquisition or expansion of an interest of at least one-third in a “real estate company” is subject to real estate transfer tax. The law defines “real estate company” as a company that primarily trades in or rents out real estate (purpose test), and whose total assets consist of more than 50 percent real estate and at least 30 percent of the total assets consists of real estate in the Netherlands (asset test).
In the case at hand, company B (and its subsidiaries) rented out storage space (self-storage). The shares in company B were sold, and the purchaser argued that the asset test was not fulfilled since the enterprise of the company was worth more than the real estate assets recorded on the balance sheet (goodwill). Furthermore, the taxpayer argued that the purpose test was not fulfilled because the main activity was not the renting out of the real estate but the business of exploiting self-storage units, which the purchaser considered to be comparable to operating a hotel.
The Dutch Court ruled that the asset test had been fulfilled. The asset test is performed on the balance sheet at the moment of acquisition. Internally/self-generated goodwill is not to be included in this calculation. Only purchased goodwill may be capitalized. The Court also ruled that the purpose test was fulfilled, since the provision of the self-storage units was the main activity of the company. Any other services provided to customers was to be considered subordinated to the rental of self-storage units.
Court of Appeal (Gerechtshof) Den Haag, July 1, 2021, ECLI:NL:GHDHA:2021:1361
Whether or not the purpose test for qualifying as a real estate company was fulfilled was also a point of discussion in another court case in Q4 of 2021. In this case, the shares in two companies were acquired. The activities of these companies consisted of exploiting two parks where plots of land were rented out for chalets and bungalows – with the chalets and bungalows owned by the tenants. The companies supplied energy and water to the tenants. Part of the business model was that the companies would buy the chalets and bungalows from departing tenants, renovate them and then sell them to new tenants. The two parks had several green areas, and the companies were responsible for maintaining these green areas, as well as maintaining the roads, assuring waste collection, fire safety and maintaining “peace and order.”
The shares in the companies were sold, and the purchaser of the shares argued that these companies did not qualify as "real estate companies" since the purpose of the companies was not the trading or renting out of real estate, but that the companies carry on a recreational business. In the camping case (Dutch Supreme Court ECLI:NL:HR:2008:BD6385) the Dutch Supreme Court had ruled that operating a camping site is similar to operating a hotel and that, therefore, the renting out of the real estate properties was to be considered secondary to the recreational services provided. An important underlying fact to this ruling, however, was that the leases in that case were mostly short term and that significant additional recreational services were provided.
The recreational services in the case at hand were very limited, and therefore the Court of Appeal had ruled that in this case, the companies were to be considered real estate companies and that the acquisition of the shares in these companies was a taxable event for real estate transfer tax purposes. In cassation, the Supreme Court agreed with the Court of Appeal and dismissed the appeal of the taxpayer without providing any further grounds.
Dutch Supreme Court (Hoge Raad), October 22, 2021, ECLI:NL:HR:2021:1586
The acquisition of legal or economic ownership of real estate properties located in the Netherlands is subject to real estate transfer tax (RETT), which is levied on the purchase price or fair-market value of the real estate property, whichever is higher.
The case at hand involves a private limited company that acquires in its capacity as managing partner in a limited partnership the legal ownership of immovable property. The economic ownership rests with the limited partners in the limited partnership. The acquiring private limited company argued that the acquisition of the “empty legal shell” of the immovable properties does not qualify as a taxable event for real estate transfer tax purposes, as it could not freely dispose of the real estate assets.
The Court of Appeal, however, ruled that the general partner did owe transfer tax in connection with the acquisition of the immovable property. The deed of transfer showed that the general partner acquired the immovable property. Under Dutch civil law, a partnership does not have legal personality, which means that it cannot independently enter into legal acts. That means that the general partner had to acquire the legal title to the property and the acquisition of legal ownership of real estate is subject to real estate transfer tax (even if the economic ownership is with another person). In cassation, the Supreme Court agreed with the Court of Appeal and dismissed the appeal in cassation without providing any further grounds. This case demonstrates once again the overkill prevalent in Dutch real estate transfer tax rules.
Dutch Supreme Court (Hoge Raad), September 17, 2021, ECLI:NL:HR:2021:1329
Until June 6, 2003, network systems had been considered movable property. The acquisition of such systems was therefore not considered an acquisition of real estate properties and therefore was not a taxable event for real estate transfer tax purposes.
On June 6, 2003 (BNB 2003/272) the Dutch Supreme Court ruled that a cable network (underground) and central antenna facility qualified as immovable property. The Dutch government thought that it was not beneficial if, going forward, the acquisition of such properties would be subject to real estate transfer tax; therefore, it introduced a specific exemption for network systems.
In the case at hand, a foundation acquired a building with healthcare apartments and a thermal energy storage system. This system consists out of three parts – a source network, a heat pump system and an indoor installation. The source network was a closed system, consisting of synthetic pipes, which were inserted into the ground at a depth of 90 to 150 meters. Water was pumped through the synthetic pipes into the ground and were thereby heated. The heated water was then pumped to the building where it was used for heating, sanitary purposes and domestic use.
The Dutch tax authorities argued that the thermal energy storage system was not a network system within the meaning of the aforementioned real estate transfer tax exemption. The case went all the way up to the Dutch Supreme Court. The Supreme Court considered that, according to the Dutch Heating Act (Warmtewet), a “heating network” is the aggregate of pipes belonging to and connected to each other, associated installations and other accessories used to transport heat, except insofar as these pipes, installations and accessories are located in a building or work of a consumer or producer and serve to supply or discharge heat for that building or work. Based on the legal history, a network may consist of cables and pipes, which are in principle used for the transport of solid, liquid or gaseous substances of energy or information. In the first place, the major national distribution networks should be considered, such as electricity, gas, sewerage, water and electronic communication networks. The Dutch Supreme Court therefore ruled that a thermal energy storage system falls within the scope of this definition, and therefore the exemption from real estate transfer tax is applicable.
Dutch Supreme Court (Hoge Raad), December 3, 2021, ECLI:NL:HR:2021:1813
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DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.
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