Court of Appeal rules that foreign entities can apply 0 percent Dutch income tax rate to Dutch real estate without need to pay Dutch dividend withholding tax

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A Dutch or a foreign entity (fund or company) that rents out Dutch real estate is subject to Dutch corporate income tax with respect to net rental income and capital gains derived from its Dutch real estate assets. The Dutch corporate income tax rate is currently 25 percent for profits in excess of 

€ 245,000 (otherwise, the rate is 15 percent). Repatriation of income from the Netherlands to the foreign entity’s head office is not subject to Dutch (dividend) withholding tax.

A Dutch entity that complies with certain rules - such as a factual and statutory limitation of its activities to normal portfolio management, rules on shareholder diversification and mandatory profit distributions within a certain timeframe - can elect to apply in its tax return the 0 percent corporate income tax rate (often referred to as the Dutch REIT-regime). Profit distributions are subject to a 15 percent Dutch dividend withholding tax and can be reduced based on Dutch tax law or the application of a tax treaty.

A foreign entity is also entitled to the above-mentioned Dutch 0 percent corporate income tax rate if it invests in Dutch real estate, provided that it also meets the conditions for and complies with the rules for the Dutch REIT regime. In that case however, the Netherlands cannot levy Dutch dividend withholding tax.

In the case at hand, a German mutual fund (Sondervermögen) argued that it should be entitled to the Dutch 0 percent corporate income tax rate. The tax inspector rejected this, arguing that the Netherlands cannot levy dividend withholding tax from a foreign entity and that this is fundamental for the application of the 0 percent Dutch corporate income tax rate.

On September 3, 2021, a Dutch Court of Appeal in Den Bosch ruled that beginning in 2008 - the year the Dutch REIT-regime was amended - foreign entities can also apply the 0 percent corporate income tax with respect to net rental income and capital gains derived from their Dutch real estate, even if the Netherlands cannot levy dividend withholding tax. The Court assessed that neither the law nor the explanatory notes in the parliamentary history to the law gives any indication that levying Dutch dividend withholding tax is a condition for application of the REIT-regime.

The Court also ruled in this case that since the German mutual fund was not willing to pay Dutch corporate income tax on accrued capital gains as at the date of application of the REIT-regime (i.e. revaluation to market value upon transitioning from the regular income tax regime to the REIT-regime), it had not complied with all the rules for applying the REIT-regime. Had the German mutual fund been willing to pay tax on the revaluation of its Dutch real estate assets, it could then have benefited from the Dutch REIT-regime.

The decision of the Court is very interesting, especially because foreign real estate investment entities may be exempt from income and withholding tax in their country of residence as well as in the Netherlands. The German mutual fund case will continue to be dealt with by the Dutch Supreme Court. The Dutch government has since published an internal memo from which it can be derived that, due to the 2008 change in Dutch income tax legislation, in certain cases (such as the one at hand) the Netherlands clearly cannot levy dividend tax and that a change to the corporate income tax will have to be found to resolve this. We therefore expect that the Supreme Court will ultimately confirm the Court of Appeal’s decision.

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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