On 3 September 2021, the Dutch court of appeal in ‘s-Hertogenbosch, the Netherlands, (the ‘Court’) ruled in a case for a client represented by PwC that under current Dutch tax law (which applies to years commencing on or after 1 August 2007) a German real estate investment fund (a Publikumsfonds in the form of a Sondervermögen), is in principle entitled to the Dutch FBI regime which grants a 0% CIT rate on Dutch sourced income to both listed and unlisted (real estate) investment funds.
In order to apply the FBI regime, certain conditions (including the portfolio investment test, the distribution test, the shareholder test and the legal form requirement) need to be met. The importance of this case is that the Court confirmed that, contrary to the position taken by the Dutch tax authorities (DTA), the German fund complies with the current legal form requirement under the FBI regime even though no (withholding) tax is effectively levied on the Dutch sourced real estate income at shareholder level.
In this case the primary question for the Court is whether the German fund qualifies as a foreign taxpayer for Dutch CIT purposes. This is because foreign entities that aren’t a legal entity, partnership or special purpose fund (doelvermogen) don’t fall within the scope of Dutch CIT and thus aren’t subject to Dutch CIT. The Court ruled that the German fund isn’t a partnership. Referring to the Dutch Supreme Court judgment in ECLI:NL:HR:2020:115, the Court concluded that the German fund qualifies as a special purpose fund and thus falls within the scope of Dutch CIT. According to the Court, the German fund didn’t issue participations on the basis of which the holder is entitled to the net assets of the fund. It’s unclear on the basis of which facts the Court came to this conclusion.
FBI regime (as of August 2007)
The subsequent question presented to the Court is whether the German fund is eligible for the FBI regime. As of the years starting on or after 1 August 2007, the Dutch CIT Act allows entities incorporated under the laws of another EU Member State to elect for the FBI regime. The Court ruled that the German fund can comply with the current legal form requirement and thus can elect for the FBI regime. The DTA argument that no foreign taxation is effectively levied on the Dutch sourced real estate income was rejected by the Court as Dutch tax law doesn’t require such taxation for a non-resident fund. It is worth noting that, before 2007, this was considered legitimate justification for restricting movement of capital by not allowing entities incorporated under the laws of another EU Member State to apply FBI.
In this case the German fund wasn’t entitled to the FBI because according to the Court it wasn’t prepared to pay the exit tax in the year preceding the first year of application of the FBI regime.
Under Dutch tax law, when entering the FBI regime, the deferred capital gains tax is added to the taxable profit of the preceding year. Under Dutch tax law, the statutory purpose of the FBI, as well as the actual activities it performs, must consist solely of portfolio investment activities. The Court considered that all activities (including those in other territories) of the German fund must fulfil the portfolio investment test for Dutch tax purposes. Subsequently, a distinction was made by the Court between the Dutch activities and the foreign activities of the German fund. According to the Court, the required proof that the Dutch real estate investment activities didn’t go beyond portfolio investment activities was delivered by the German fund. The most important fact supporting this decision was that the real estate developments acquired by the German fund were all acquired through a turnkey agreement under which the principal development risks were for the account of the selling property developer. In relation to the activities of the German fund outside the Netherlands, the Court considered that the DTA doesn’t enforce the investment test in relation to foreign activities of Dutch FBIs. Enforcing the investment test on the non-Dutch activities of foreign funds would be a breach of the free movement of capital without any valid justification. Taking all the above into account, the Court concluded that the portfolio investment test is met by the German fund.
Following the intensive and lengthy discussions with the DTA, the entitlement of German real estate investment funds to the FBI regime has (finally) been confirmed by a Dutch court of appeal. This is good news for, in particular, German funds that have invested in Dutch real estate on or after 1 August 2007 and made timely objections against CIT assessments in the Netherlands. Based on this decision and provided the normal requirements are met, they can claim the FBI regime in the Netherlands, resulting in an effective exemption of Dutch taxation on the Dutch sourced real estate income. German and other foreign real estate investment funds which have invested in Dutch real estate directly should also consider filling objections against CIT assessments in the Netherlands if they can meet the FBI requirements. The case may be brought to the Dutch Supreme Court which will then ultimately decide on the application of the Dutch tax law. In addition, we note that the Dutch Ministry of Finance has announced to reconsider the future of the Dutch FBI regime pending the outcome of this case.
Why is this relevant for Swiss real estate funds?
Although the court case was rendered in the context of a German fund, we believe it could also apply to comparable funds in other countries, even if outside the European Union. Swiss real estate funds investing in real estate in the Netherlands should analyse their position and consider if filing a protective claim would be appropriate.