The Dutch tax treatment of a German Sondervermögen investing directly in Dutch real estate has been an important point of contention in Dutch case law, particularly regarding the potential applicability of the Dutch FBI-regime. On Friday 14 June 2024, the Dutch Supreme Court issued an important ruling in this regard. The Supreme Court decided that a German Sondervermögen cannot qualify as a 'special-purpose fund' (doelvermogen) if it issues participation rights that entitle its holders (i.e., investors) to the capital of the Sondervermögen. Since a German Sondervermögen furthermore does not qualify as a corporation or partnership either, it is not subject to Dutch corporate income tax (CIT) as a non-resident taxpayer. Therefore, any income derived by the German Sondervermögen from directly owned Dutch real estate should not be subject to Dutch CIT.
Simplified outline of the case
The case at hand concerned a German Publikumsfonds (Immobilien-Sondervermögen, Fund), among others directly owning Dutch real estate. The legal title of the Dutch real estate assets was held by the Fund's custodian, with the economic beneficiaries being the Fund's investors as holders of the participation rights (bewijzen van deelgerechtigdheid) in the Fund's capital.
The Fund had claimed the 0% CIT rate of the Dutch FBI-regime (fiscale beleggingsinstelling) on its Dutch real estate income, as it deemed itself comparable to qualifying Dutch resident funds directly owning Dutch real estate. This argument assumes the Fund was in principle subject to Dutch CIT.
As an additional argument, the Fund had also taken the position that it was not subject to Dutch CIT in the first place, claiming that it did not qualify as a non-resident taxpayer for Dutch CIT purposes.
Non-resident taxpayer
The Supreme Court first dealt with the non-resident taxpayer position of the Fund. In this respect, the Supreme Court decided that a Sondervermögen should be considered a foreign legal form equivalent to a Dutch mutual fund for joint account (fonds voor gemene rekening, FGR). In this regard, the Supreme Court ruled that a (non-transparent) FGR or comparable foreign legal forms with the purpose of collective investment (such as the Fund), are not included on the exhaustive list of non-resident taxpayers.
Subsequently, the Supreme Court considered the possible qualification of the Fund as a 'special-purpose fund' (doelvermogen), which qualification would result in the Fund being subject to Dutch CIT as a non-resident taxpayer. In line with its previous ruling from 24 January 2020 regarding Dutch dividend withholding tax, the Supreme Court ruled that a Sondervermögen does not classify as a 'special-purpose fund' (doelvermogen) for tax purposes if it issues participation rights that entitle its holders (i.e., investors) to the capital of the Sondervermögen. This ruling is significant, as it deviates from the prior conclusions of both the Court of Appeals and the Advocate-General, which had previously concluded that the Fund should qualify as a 'special-purpose fund' irrespective of the participation rights issued by the Fund.
As a result of the above, the Fund was not considered a non-resident taxpayer for Dutch CIT purposes. Consequently, the Fund was and is not subject to Dutch CIT on its income from Dutch real estate. Therefore, the Supreme Court did not further consider the Dutch FBI-regime argument of the Fund.
Impact
The Supreme Court ruling should similarly apply to other German Sondervermögens with multiple investors and comparable foreign legal forms that directly invest in Dutch real estate and have issued participation rights that entitle its holders (i.e., investors) to their capital. For the current and previous tax years, these Sondervermögens and comparable foreign legal forms should not be subject to Dutch CIT. This may result in a refund of Dutch CIT already paid, but this is something to be further checked on a case-by-case basis. With respect to German Sondervermögens, the German tax treaty position may also become of relevance in this regard.
What's next?
The Dutch legislator has already adopted new Dutch entity tax classification rules that will come into force as from 1 January 2025 (see also our Quoted). As part of these changes anticipating the Supreme Court ruling, the (non-transparent) non-resident FGR and comparable foreign legal forms will be included on the exhaustive list of non-resident taxpayers. Therefore, as from 2025, such German Sondervermögens or comparable foreign legal forms directly owning Dutch real estate will again become subject to Dutch CIT on income from Dutch real estate.
Furthermore, the FBI-regime will no longer apply as from 1 January 2025 to Dutch entities directly owning Dutch real estate. Therefore, the FBI-regime argument can going forward also no longer be claimed by foreign legal forms directly owning Dutch real estate.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.