The Fund is structured as a fiscal investment institution (fiscale beleggingsinstelling, or ‘FII’) within the meaning of Article 28 of the Dutch Corporate Income Tax Act 1969 (Wet op de vennootschapsbelasting 1969). An FII is subject to Dutch corporate income tax at a rate of 0%, provided that certain requirements are met regarding the Fund’s distribution of profits, its activities, leverage and shareholders.
In the autumn of 2017, the Dutch government announced it planned to close the Dutch FII regime for direct investments in real estate. This measure is supposed to come into effect as per 1 January 2020. However, an alternative fund structure, the so-called closed fund for joint account (besloten FGR), seems a good alternative for investors. For taxation purposes, the profits of such a fund are attributed to the investors rather than being taxed at fund level.
Given the potential tax costs (transfer tax) and the complexities of a restructuring plus the disadvantages of such an alternative structure (especially on the liquidity front) Bouwinvest supports all efforts that are being made to convince the government not to change the law in this respect.
An FII is obliged to distribute its distributable profit annually within eight (8) months after the end of the relevant fiscal year (doorstootverplichting). The distributable profit generally only includes current income (dividends, interest and rental income). The (realised and unrealised) gains on securities and the realised gains on all other investments (including real estate), which are added to a so-called reinvestment reserve (herbeleggingsreserve), are not included in the distributable profit.
An FII is obliged to be engaged exclusively in portfolio investment activities, i.e. it may not (partly) conduct an active trade or business. Whether an activity is characterised as a portfolio investment activity or as a business activity for Dutch tax purposes depends on all the relevant facts and circumstances. Additional rules apply for real estate development activities related to the FII’s own real estate portfolio. In this respect, an FII may engage in development activities for its own real estate portfolio, provided that the property development is carried out within a taxable subsidiary that carries out the development activities on behalf of the FII. Improvements to existing properties do not qualify as development activities provided that the capital expenditure is less than 30% of the value of the property as determined by the Dutch Valuation of Immovable Property Act (Wet waardering onroerende zaken) prior to the improvements.
An FII may finance its investments with debt up to a maximum of 60% of the fiscal book value of the real estate property, plus 20% of the fiscal book value of all other investments.
To qualify as an FII, at least 75% of the Fund must be owned by:
Entities that are not liable for profit tax and the profits of which are not taxed at the level of the beneficiaries
Entities that are exempt from profit tax and the profits of which are not taxed at the level of the beneficiaries
It is also prohibited for entities resident in the Netherlands to collectively own an interest of 25% or more in the Fund through one or more mutual funds or corporate entities not resident in the Netherlands with a capital divided into shares; and no single individual may own an interest of 5% or more.
Bouwinvest Residential Development B.V., established December 2017, is a taxable subsidiary that carries out development activities for the Residential Fund. Since no services were recognised in 2017, the taxable profit was nil.
In December 2016, the Fund established a taxable subsidiary, Bouwinvest Dutch Institutional Residential Fund Services B.V., which renders services that are ancillary to the renting activities of the Fund. The profit before tax of Bouwinvest Residential Development B.V. was € 67.000, while the income tax amounted to € 13.000.
The Residential Fund met the requirements of an FII in 2017. The effective tax rate was 0% (2016: 0%).