New property acquired through a share transaction taxed at 10.4% from 2024

A draft bill excludes the acquisition of new property through a share transaction from the overlap exemption. It also catches situations in which saving VAT plays no part at all.

The supply of a newly built or renovated building or of building land by a taxable person is automatically subject to 21% VAT. To avoid both VAT and transfer tax arising on the same transaction, the acquisition is exempt from transfer tax under the overlap exemption.

Such property can also be transferred by transferring the shares in the property company rather than the property itself. A share transfer is not a transaction automatically subject to VAT. Even so, the Dutch Supreme Court held in 2007 that acquiring those shares shares in the overlap exemption where the underlying property is new. That is the look-through approach.

The draft bill

Because of the look-through approach, acquiring new property through a share transaction bears neither VAT nor transfer tax. That makes a share transaction fiscally attractive above all for developers supplying buyers with little or no right to deduct, such as educational institutions, pension funds, residential landlords, care institutions, banks and insurers. The developer cannot deduct the VAT on its development costs, but owes no 21% VAT on the value it has added and in principle no 10.4% transfer tax arises on the acquisition.

The Ministry of Finance has put a bill out for consultation to end that non-taxation. It proposes excluding the acquisition of shares in a property company from the overlap exemption from 1 January 2024. On a transfer of new property through a share transaction, 10.4% transfer tax would therefore in principle be due from 2024.

Our comments

In our view it is both striking and unnecessary that the proposal also catches situations in which saving VAT plays no part. Where the buyer can deduct virtually all the VAT, saving it is not a reason to choose a share transaction. Yet the proposal imposes transfer tax there too. To that extent it goes further than is needed to achieve its aim of countering tax-saving share transactions.

The ministry could easily remove that overreach. The proposed exclusion could, for instance, be qualified with words to the effect of "unless the acquirer can deduct the VAT in full or almost in full". The overlap exemption would then continue to apply on a transfer to a buyer able to deduct at least 90% of the VAT.

It would also be desirable for the ministry to provide transitional rules for property projects already under way, which cannot have taken this additional transfer tax burden into account.