The options for a tax-efficient transfer of property held by a private limited company are currently a highly topical issue. Our previous article The issue concerned whether, for the purposes of valuing the shares in the property company, the property may be valued at its liquidation value for the purposes of gift tax. The District Court of the Northern Netherlands recently published a very interesting ruling in this regard ruling on the application of the business succession exemption from transfer tax.
Real Estate Ltd.
A property company refers to a private limited company (or a group of such companies) whose assets consist predominantly of property. When shares in such a company are transferred, the following taxes are generally applicable:
- income tax;
This concerns the substantial interest tax, which 25% is equal to the difference between the value of the shares transferred and the cost price of those shares; - inheritance or gift tax;
if the shares are acquired as part of an inheritance or are transferred at a value lower than their market value, inheritance or gift tax is payable (at rates of between 10% and 40%); - transfer tax;
The shares in a property company are usually treated as a notional property, which means that, upon the transfer of these shares, transfer tax is payable on the value of the underlying property, without taking the debts into account (at the rate of 6% or, insofar as residential properties are concerned, 2%).
Exemptions
Given the rates mentioned above and the fact that property generally has considerable value, it will come as no surprise to you that the tax liabilities can mount up very substantially. That is why the exemptions for the transfer of business assets – which can be described as generous – are so appealing:
- for the purposes of income tax, the substantial interest claim may be carried forward without any formalities;
- For the purposes of inheritance and gift tax, the following are exempt under the Business Succession Scheme (BOF)¹:
- the difference between the company’s liquidation value and its lower going-concern value;
- of the going concern value, €1,060,298 is fully exempt;
- The portion of the going concern value in excess of €1,060,298 is exempt under 83%.
A condition for the application of these exemptions is that shares must be acquired in a private limited company (B.V.) that carries on a substantive business. The Supreme Court has already ruled that a property-owning private limited company may carry on a substantive business, but this does depend very much on the specific circumstances of each individual case. In practice, the Tax and Customs Administration sets the bar very high for the burden of proof resting on the taxpayer; perhaps even considerably higher than the tax court does.
Business succession exemption from transfer tax
There is also an exemption from transfer tax for the acquisition of property in the context of business succession (business succession exemption). This must relate to:
- an acquisition by one (or more) of the entrepreneur’s children, grandchildren, brothers, sisters or spouse;
- of goods forming part of the assets of the undertaking from which they are acquired;
- which business is to be continued in its entirety by the transferee(s).
The question was put to the District Court of North Holland as to whether this business succession exemption could also be applied to the acquisition of shares in a property company. After all, shares are being acquired rather than assets forming part of the seller’s business. The Court ruled that, for the purposes of transfer tax, one must also look beyond the corporate shell of the private limited company. If the private limited company carries on a substantive business, the business succession exemption may also be applied to the acquisition of the shares. This is only different where the property has been placed within the legal structure of the private limited company with a view to avoiding transfer tax.
In the case on which the court ruled, it had been established for the purposes of income tax and gift tax that the property company was carrying on a genuine business. The Tax and Customs Administration had already confirmed this in writing to the party concerned prior to the transaction.
Appeal
It is likely that the Tax and Customs Administration will lodge an appeal or a direct appeal to the Supreme Court against the district court’s ruling. We consider the chances of the Court of Appeal and/or the Supreme Court upholding the district court’s ruling to be 50/50. Purchasers of shares in a private limited company (B.V.), which for the purposes of transfer tax are treated as if they were immovable property, would therefore be well advised not to make use of the business succession scheme, but to pay the transfer tax on time and then to safeguard their formal rights by means of a pro forma objection, requesting that the objection be set aside pending the outcome of the proceedings described above.
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¹ Figures for acquisitions in 2016. The Government is reviewing (the level of) the BOF.