On September 3, 2021 on the website of the Dutch courts a judgment of the court of appeal of 's-Hertogenbosch (Gerechtshof 's-Hertogenbosch) in the joined cases 18/00721 upto and including 18/00732 and 18/00746 was published (ECLI:NL:GHSHE:2021:2629). The interested party in the underlying case is a German resident Immobilien-Sondervermögen that also invests in Dutch real estate. Under dispute is whether the Immobilien-Sondervermögen is liable for Dutch corporate income tax purposes and if so whether it is entitled to the benefits of the Dutch fiscal investment enterprise regime (fiscale beleggingsinstelling regime or short fbi-regime)?
The lower court of Zeeland-West-Brabant previously ruled that the Immobilien-Sondervermögen was partially eligible for the fbi-regime, and the regime was applicable for a number of financial years. Both the Sondervermögen and the tax authorities have appealed against the decision of the lower court of Zeeland-West-Brabant. The Immobilien-Sondervermögen also invests in Dutch real estate and is of the opinion that the fbi-regime is fully applicable.
In its ruling of September 3, 2021 the court of appeal ruled that the Immobilien-Sondervermögen qualifies as a special purpose fund (doelvermogen) and that therefore based on Artikel 3, Paragraph 1, lsub c, of the Dutch corporate income tax Act it is liable to the Dutch corporate income tax as a non-resident taxpayer.
The fbi-regime explained on a very high level
The fbi-regime arranges that 0% corporate tax is levied at level of a qualifying fund, provided that the fund distributes it profits in the form of a dividend to the participants within 8 months after the end of the year. Instead of corporate tax being paid by the fund, the participant pay dividend withholding tax over the distributions they receive. The tax burden of the participant a qualifying fund is comparable to that of an investor who invests directly, so without the interposing of a fbi.
Funds residing abroad are not subject to Dutch dividend withholding tax. A foreign fund with a fbi-status cannot withhold Dutch dividend withholding tax over the distributions it makes to its (foreign) participants. As a result, the Netherlands misses out on tax. In addition, foreign participants are often not otherwise taxed abroad for the results they realize by investing in Dutch real estate.
The judgment in the underlying case
The fbi-regime was changed in 2007. Because the underlying case regards several financial years, the court of appeal made a distinction between the old (applying to the pre 2007 financial years) and the new fbi-regime (applying to the financial year 2007 and later). Under the old regime, foreign funds were eligible for the fbi-regime. The court of appeal finds this distinction between Dutch and foreign funds a restriction of the free movement of capital as it applies within the European Union. However, the court finds that there are justifications for the restriction. On one hand there is 0% corporate income tax rate, whereas on the other hand there is the obligation to distribute profits. Because the foreign fund is not subjected to the Dutch dividend withholding tax, in the underlying case the Netherlands would not be able to levy any tax at all. However, the court is of the opinion that the foreign fund should be given the opportunity to pay a replacement amount that is equal to the dividend withholding tax that would be levied if the Immobilien-Sondervermögen would be a qualifying Dutch fund. If a foreign fund agrees to such replacement payment, the court of appeal is of the opinion that the fbi-regime can be applied and thus the foreign fund does not have to pay any Dutch corporate income tax. However, in the underlying case the Immobilien-Sondervermögen did not agree with paying such replacement payment and so the inspector rightfully did not apply the fbi-regime in the underlying case.
Under the new fbi-regime (applying from August 1, 2007 onwards), foreign funds are allowed to apply the fbi-regime. For that it is not required that Dutch dividend withholding tax is paid over the distributed profits. It is required, however, that in the year prior to the first year that the taxpayer wants to apply the fbi-regime the taxpayer values all its assets at fair market value and that the (hidden) reserves of the taxpayer are included in its taxable profit, so that Dutch corporate income tax is paid over them. In the underlying case the Immobilien-Sondervermögen has not done so and and it did not agree to still do so. According to the court of appeal for that reason, the new fbi-regime also does not apply to the later years. Therefore the Immobilien-Sondervermögen still has to pay the Dutch corporate income tax that is due over later years.
The full text of the judgment of the court of appeal of 's-Hertogenbosch can be found here. Please note that the judgment is only available in the Dutch language.
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