When investing in foreign real estate by Dutch residents, fiscal planning can greatly influence the net result. In most countries, selling profits are taxed. Based on tax treaties, the country where the real estate is located can tax income from real estate and selling profits. In some countries, the profit related to a share transaction is taxed in so far as this is attributable to the real estate located in the relevant country. Check if the tax treaties covers this. This applies to many tax treaties concluded by Spain. Incidentally, the treaty that Spain has concluded with the Netherlands does not contain such a measure. See also NL-Switzerland Tax treaty 2010.
When selling real estate located in their jurisdiction, many countries require that the seller or the notary retain and pay on a part of the selling price to the Tax Authorities (Belgium, Canada, France, Spain and the U.S., for example). Subsequently, the foreign seller must themselves file a declaration. Depending on the amount of the tax liability, either an additional payment must be made or one is entitled to refund of an excessively-withheld sum.
In some less-developed countries, only individuals with the same nationality can purchase real estate. In practice, one can sometimes get around these limitations through allowing the purchase to be made by a locally-established company or arranging it through a figurehead. Therefore, the client must make certain that the party with whom they are dealing is genuine.
Most countries have additional property levies. Examples include transfer taxes and local levies. Some countries include real estate in a wealth tax, a tax which also sometimes applies to legal entities. Rent revenue is often taxed as income taxation; sometimes a notional sum is designated as rent income (in Belgium: the Property Tax that is applied on Land Registry Income) or a part of rent revenue received may be subtracted as rent revenue notional cost deduction.
A second residence can often be best held directly by the physical person. Ownership through a company often leads to costly additional complications. For second residences located in France, it can be useful to use an SCI (Société Civile Immobilière). An SCI is for French tax purposes a semi-transparent legal instrument, which means that SCI possession for French tax purposes are attributed to the underlying associates. Whether this is also applicable for Dutch tax purposes, depends on the SCI deed of Incorporation.
Please note, however, that owning foreign real estate leads to compliance costs in that country. One will have to file a tax return as a foreign taxable person there.
Where investment property is held by a large amount of investors, a limited partnership (cv) is often chosen. The individual partners will, in many cases, all have to file a tax return in the country of situs. For this purpose, it is useful to implement a group arrangement with a local accountant’s firm. Keeping in mind that the partnership is fiscally transparent, the partners are entitled in the Netherlands to a deduction to taxation elsewhere. However, in order to avoid local tax liability, property obligations are chosen more often. These come under box 3 in the Netherlands. An attempt should be made to make the interest payable on this in the country of situs tax deductible.
Corporate real estate investors
By means of finance with loan capital (possibly inter-company), in combination with depreciation, the net rent revenue can, in many cases, remain limited or even be reduced to nothing. It is often tax effective to have the real estate held by separate companies. One can have the shares in the property company held by a holding company. Sometimes a double holding structure is implemented. Through this, the sale of the property can take the shape of a share transaction, whereby the profit is held outside of the country of situs. In the Netherlands, the participation exemption can be used for this. By using this path, one can sometimes also avoid transfer taxes.
In principle, in the case of property transactions in the form of a share deal, one must take tax latency in respect of the possible added value into consideration.
Property participations are excluded from the low-taxed investment participation regime. This means that the regular participation exemption is applicable.
Watch out for possible withholding taxes on cross-border interest and dividends.
Though financing at a holding level, it can be possible to effectuate the interest deduction in a country other than that of the country of situs of the property. This can be beneficial if the tax rate in the other country is higher than in the country of situs. For this, it is naturally certainly necessary that one has sufficient tax potential in the other country. Watch out for possible regulations limiting interest deduction in the country in question. In order to double tax deduction regarding the interest possible, so-called hybrids are certainly used. These are holding companies that are viewed as being tax transparent in one country and as a fiscal entity in the other country.
The regulations for capitalising and including as expenses with respect to maintenance expenditure and/or improvement are not the same everywhere.
Please also take account into VAT considerations.
Have any other questions regarding resal estate investments? If so, get in touch with our expert, Jimmy Cox.