Supreme Court: Dutch RETT may be due on acquisition of self-storage company
On April 16, 2021, the Dutch Supreme Court set aside the ruling of the Higher Court that the acquisition of the shares in an entity that primarily rents out storage space (i.e., self-storage entity) is not subject to Dutch Real Estate Transfer Tax (RETT). This decision is in line with the opinion of the Advocate General published last year. In this alert, we highlight the relevant elements of this decision for the Dutch real estate market.
Background
X BV belongs to an international concern active in the rental of storage space business (self-storage). On June 30, 2015, X BV acquired the shares of competitor B BV for a sum of EUR116.9 million.
In dispute is whether B BV’s business model (i) is in the rental of storage space and other services ancillary to the letting of storage space or (ii) is the provision of managing and safekeeping the customer’s goods with the rental of storage space ancillary to these services. In the latter scenario B BV does not qualify as real estate company, as a result of which RETT would not be payable on the acquisition of the shares.
The Dutch tax authorities and the District Court were of the opinion that B BV’s main activity is the rental of storage space and subsequently B BV qualifies as real estate company. The Taxpayer and the Higher Court are of the opinion that B BV’s main activity is similar to a hotel (for goods) or data center, at least a business where these other services dominate the rental of storage space so that B BV should not qualify as real estate company.
Legal Framework real estate company
For RETT purposes, a ‘‘real estate company‘‘ is an entity with capital divided into shares (usually a limited liability company) whose assets,
- at the moment of purchase or in the 12 months preceding the purchase,
- consist or consisted of at least 50% real estate and, at the same time, consist or consisted of at least 30% Dutch real estate (the Asset Test) ,and,
- at least 70% of the real estate is being used for acquiring, selling and exploiting such real estate (the Objective Test).
If a company qualifies as a real estate company, RETT will in principle be due if the purchaser acquires a qualifying interest in the real estate company. A qualifying interest is acquired if the purchaser, alone or together with related companies or related persons, acquires and/or owns at least a one-third (1/3) interest (represented by shares). The RETT taxable basis is the fair market value of the underlying Dutch real estate that is represented by the shares. The RETT rate for commercial properties is at present 8% (such rate was previously set at 6%).
Higher Court ruling
The Higher Court ruled that the self-storage business model of B BV could not be characterized as the rental of real estate for the storage of goods, as a result of which the Objective Test was not met. According to the Higher Court, B BV provides more services than the mere rental of real estate. The services, such as the lease of trailers, the provision of trolleys, assisting with the storage and removal of goods from the storage space, sale of packaging materials and locks, insurance and security of the customer’s goods, dominate the rental of storage space. Additionally, the Higher Court considered the self-storage business model to be more comparable to the hotel business or data center business, where the rental of (storage) space is ancillary to the other services.
Opinion Advocate General
The Advocate General concluded that the Higher Court insufficiently motivated why the legal criteria for being a real estate company have not been met. Specifically the ‘‘Objection Test‘‘ was not sufficiently motivated. According to the Advocate General’s opinion, B BV’s other activities cannot be qualified as any services other than additional activities performed in the context of the rental of storage space.
Supreme Court judgement
In line with the opinion of the Advocate General, the Supreme Court set aside the ruling of the Higher Court. The Supreme Court confirms the Objective Test and clarifies that whether, at least 70% of the real estate is being used for acquiring, selling and exploiting such real estate, must be assessed from the customer’s perspective. Any (operational) activities that are not aimed at individual customers (such as overhead) are not relevant for this assessment.
The Higher Court did not sufficiently motivate why B BV’s business should not meet de Objective Test. The referral Court has been instructed to determine whether the rental of storage space to customers is ancillary to the other services rendered by B BV to its customers.
Concluding remarks
Supreme Court provides further clarification on the criteria for an entity to be qualified as a real estate company. Based on this ruling, in the event of a purchase of shares in a company holding real estate, it is very important to determine the exact activities of the target to its customers, to determine whether the target qualifies as real estate company or not.
