The Netherlands - Tax

During Budget Day 2024, the Dutch government announced that the transfer tax rate for residences not used as owner-occupied homes will be reduced from 10.4% to 8% starting 1 January 2026. The 8% rate will only apply to all acquisitions of residences, with the exception of cases where the existing reduced rate of 2% or an exemption applies. Thus, the new 8% rate will apply only to investors acquiring residential properties.

The purpose of this measure is to increase the supply of rental housing by encouraging investment in (private) rental housing. Another goal is to encourage the construction of more (private) rental housing by reducing the final tax burden on sales.

The earnings stripping rule (implementation of the EU Anti Tax Avoidance Directive 1) stipulates that the net interest owed by a taxpayer is deductible only up to 20% of the fiscal EBITDA or EUR 1 million, whichever is higher. The government now proposes to increase the percentage to 25%, bringing it more in line with the EU average.

In practice, activities/assets are frequently spread across multiple companies to take advantage of the EUR 1 million threshold. This occurs, for instance, when real estate investors use separate entities for each property or split a property over multiple entities. The government aims to combat this fragmentation, but only for real estate companies. In the Dutch Budget 2025 it was therefore proposed to no longer apply the EUR 1 million threshold as of January 1, 2025 if, for at least half of the year, the taxpayer’s assets primarily consist of real estate leased to third parties. However, this is under discussion and there might be insufficient support for this measure from the Dutch coalition government. As a budget alternative decreasing the 25% deduction percentage into 24,5% is now discussed. This will all become clear during the legislative process until the end 2024.

As highlighted in our previous quarterly updates in 2023 and 2024, as from January 1, 2025 a new framework to assess the tax transparency of both domestic and foreign legal entities will be introduced. The proposed changes are still scheduled to become effective as from January 1, 2025.

The main objective of this legislative change was to avoid international entity qualification mismatches. One of the most common mismatches is the case where a limited partnership is considered non-transparent in the Netherlands, while it is considered transparent abroad. Therefore, based on the proposed changes in the entity qualification rules, all Dutch limited partnerships will be considered transparent. The same applies to foreign limited partnerships that are sufficiently comparable to the Dutch limited partnership. However, based on the wording of the changed definition of the fund for common account (‘fonds for gemene rekening’ or ‘FGR’) as of January 1, 2025 (for more details reference is made to our previous quarterly updates) a Dutch limited partnership and a comparable foreign limited partnership could be qualified non-transparent if their units are tradable and they are considered an investment fund within the definition of article 1:1 of the Dutch Financial Supervision Act (‘Wet financieel toezicht’). This could have impact for limited partnerships, which are now non-transparent but also for transparent limited partnerships becoming non-transparent from January 1, 2025. The Dutch Association of Tax Advisers (‘Nederlandse Orde van Belastingadviseurs’) already criticised this element in the proposed legislative changes, but based on internal documents of the Dutch Ministry of Finance no amendments are intended in this respect. More developments are expected in late 2024 or early 2025 in this respect.

On September 5, 2024, the Court of Justice of the European Union (CJEU) offered important guidance on whether certain Dutch pension funds may be classified as "common investment funds”, thereby exempting their management services from VAT. Such an exemption would significantly reduce costs for pension funds due to the limited VAT recovery typically available on these services.

The CJEU provided the following key criteria for determining whether a pension fund qualifies as a common investment fund:

• If pension entitlements and benefits are calculated based on factors like years of service and salary, without any adjustment linked to investment returns, participants do not assume the investment risk.
• Conversely, if entitlements and benefits fluctuate according to the fund's investment results, then participants bear an investment risk, provided these benefits are primarily dependent on investment outcomes.
• Other factors may also impact this assessment, such as whether participants collectively or individually bear risk in case of fund insolvency, or if the employer offers limited guarantees for pension accruals. However, these factors alone are not decisive.

Following this approach, Dutch courts will now assess each case individually to ascertain if these conditions apply. Dutch courts must also evaluate whether defined benefit funds afford participants a legal and financial position comparable to those in defined contribution plans, which are already classified as common investment funds.

This ruling is essential for pension funds currently contesting VAT obligations on management services, with Dutch courts expected to apply this framework to pending cases. Additionally, upcoming pension reforms in the Netherlands may further influence VAT treatment for pension fund management.

In the Withholding Tax Act 2021 (‘Wet bronbelasting 2021’), the paying entity (the withholding agent) and the receiving entity (the beneficiary) must be related parties. A qualifying interest is the requirement for the levying of withholding tax on interests, royalties and dividends Such a qualifying interest can be held individually, but it can also be held collectively by a group of entities, provided that the group is defined as a cooperating group (‘samenwerkende groep’) in accordance with Article 10a, paragraph 6, of the Dutch Corporate Income Tax Act of 1969 (‘Wet op de vennootschapsbelasting 1969’).

In practice, the current definition of a cooperating group does not align well with the objectives of the Withholding Tax Act 2021. As a result, a proposal has been made to introduce a new group concept for conditional withholding tax purposes, replacing the current concept. The proposed new group definition is referred to as a qualifying unity (‘kwalificerende eenheid’).

According to the proposed legislative text and accompanying explanation, a qualifying unity exists when entities act together with the primary objective or one of the primary objectives being avoidance of conditional withholding tax of one of those entities. The burden of proof regarding the existence of a qualifying unity rests with the tax inspector. The proposed measure is expected to come into effect on 1 January 2025.