Update: acquiring new property through a share transaction from 2025

After consultation with the property sector the draft bill has been amended. There will be a 90% test, a 4% rate and transitional rules for projects under way, with effect from 2025.

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 what is known as the overlap exemption.

Such property can, however, 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 2011 that the acquisition of those shares shares in the overlap exemption where the underlying property is new. That is known as 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 it 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 wants to end that non-taxation. Under the original proposal, acquisitions of shares in a property company would have been excluded from the overlap exemption from 1 January 2024.

As we wrote in our article of 28 February 2023, the original proposal also caught situations in which saving VAT plays no part at all. Where the buyer can deduct virtually all the VAT, saving it is not a reason to choose a share transaction. We also said it was undesirable that no transitional rules were proposed for projects already under way: those could not have taken the extra burden into account, so 10.4% transfer tax could jeopardise their viability.

The amendments

Following input from and consultation with the sector, the State Secretary has told parliament that the bill will be amended to take the sharpest edges off.

To remove the overreach, the overlap exemption continues to apply where the acquirer uses the property at least 90% for taxable supplies for two years after acquisition. That 90% test is an obvious choice, because the existing exemption already contains one.

The two-year reference period does give the exemption a conditional character. Where within those two years more than 10% of the property comes to be used for non-taxable purposes, such as exempt letting, education, care or public authority activities, the exemption falls away and 10.4% transfer tax plus interest becomes payable after all. Particularly where the price includes costs and the seller pays the transfer tax, the seller will need clear contractual arrangements with the buyer. It will want to avoid an incorrect declaration about the 90% test, or a later change of use over which it has no influence, resulting in a claim.

On a property share transaction the seller has no right to deduct. The original proposal did not take that into account. To remove that overreach too, a maximum rate of 4% will apply instead of the standard 10.4%. The cumulative burden of 21% non-deductible VAT on construction costs plus 4% transfer tax then roughly matches the VAT burden on a direct acquisition of the property itself. A third rate is therefore added, alongside 10.4% and the 2% rate for homes.

Projects already under way are also accommodated. Until 1 January 2030 the old overlap exemption continues to apply where an agreement in the form of a letter of intent was signed at the time the bill was introduced. The amended proposal will be introduced on Budget Day but only takes effect on 1 January 2025. That later commencement, combined with the transitional rules, gives the sector time to prepare.