Tax Inspector rightly refused to qualify German Sondervermögen as FII | Deloitte Nederland

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Tax Inspector rightly refused to qualify German Sondervermögen as FII

Den Bosch Court of Appeal rules out comparability of German fund with FII. For FYs up to 2007/2008 because the fund refused to make replacement payments and for FYs as from 2008/2009 because the revaluation requirement under Art. 10 BBI is not met.

17 September 2021

Fiscal investment institution or not?

The interested party is Immobilien-Sondervermögen, established in Germany and incorporated under German law. The fund invests in real estate worldwide, including the Netherlands. Through their participations, the participants in the fund are the beneficial owners of the real estate and the other investments. In Germany, the fund has been classified as a fiscally transparent separate fund without legal personality. The Zeeland-West Brabant District Court previously ruled that the interested party is eligible for the FII status, except for the financial year 2009-2010. Both the interested party and the Tax Inspector have appealed against this judgment.

Tax liability

The interested party principally argued that it had no foreign taxpayer status at all. However, the Den Bosch Court of Appeal ruled that the interested party was effectively liable to corporate income tax as a special-purpose fund. The mere fact that securities have been issued does not preclude a qualification as special-purpose fund. Only if the assets belong to the holders of the securities do they not qualify as a special-purpose fund. After assessing the tax liability of the special purpose fund, the Court examined whether the Sondervermögen satisfies the conditions for classification as an FII and, in particular, whether those conditions may be contrary to EU law. In doing so, a distinction is made for the tax years up to 2007/2008 and from 2008/2009 onwards.

Up to 2007/2008: Investment requirement

First, the FII status of the special-purpose fund was addressed. Pursuant to the investment requirement, the articles of association may not mention any activities other than investment. However, the articles of association of the interested party provide for the possibility to invest up to 20% of the interested party’s assets in new real estate projects. The Court of Appeal ruled that this does not (yet) rule out that the interested party has the objective of investing capital under the articles of association. It must therefore be assessed whether it actually makes use of this possibility. It must be assessed for each specific case whether the involvement of an investment institution is so strong that it can no longer be called an investment. According to the Court of Appeal, the fund does not cross the line from investment to project development. The fund uses a fixed gross initial yield when investing in new property projects, so that any windfalls or setbacks during construction are not to the benefit or detriment of the interested party. The Court of Appeal argued that this action, too, qualifies as “investing”.

For the application of the investment requirement, the worldwide activities of the fund should in principle be tested. However, the interested party argued that only domestic activities are taken into account in this assessment for domestic FIIs. Therefore, the fund believed that both the principle of equality and the freedom of capital movements were violated. The Court of Appeal considered it plausible that the tax authorities do not actually check whether the investment requirement in respect of foreign property projects is met in the case of domestic FIIs. By exercising such control on foreign property funds, the movement of capital is impeded.

Up to 2007/2008: establishment and incorporation requirement

Until 1 August 2007, the requirement was that a FII must be a public limited company (naamloze vennootschap), a private limited company (besloten vennootschap) or mutual fund (fonds voor gemene rekening) established in the Netherlands. The Court of Justice assessed whether these requirements are contrary to EU law. According to the Court, it is clear that entities established under foreign law and domiciled in other Member States are treated more unfavourably than domestic entities.

Up to 2007/2008: both infringements of EU law justified, but disproportionate

According to the Tax Inspector, both the infringement of the investment requirement and of the establishment and formation requirement could be justified on the basis of the principle of fiscal cohesion. The Court followed this analysis, but added that it would not be proportionate to deny the FII status on that ground. The fund should be given the opportunity to make a substitute payment, as advocated by the Supreme Court, equal to the dividend tax that the Sondervermögen would have owed had it been established in the Netherlands. However, the interested party has not shown any willingness to make such a substitute payment, so that the Court of Appeal concluded that the Tax Inspector was right to deny the FII status for the financial years up to and including 2007-2008. For those years, the corporate income tax assessments imposed on the Sondervermögen will therefore not be reduced. The dispute then turned to the financial years 2008/2009 and 2009/2010.

As from 2008/2009: diversion criterion

As of 1 August 2007, the FII regime also applies to entities established or entered into under the laws of a Member State of the EU, which are comparable to the aforementioned entities established or entered into under Dutch law in terms of their nature and organisation. However, the Tax Inspector argued that, even if the interested party meets the legal requirements, the objective and purport of the FII regime oppose the granting of FII status to the interested party. This is because the diversion criterion (verleggingscriterium), which requires that profits received by an FII be distributed to the participants in the FII within eight months of the end of the calendar year in which the profits were received, is not met. However, the Court judged that the legislator accepted the risk that the taxing rights could not be exercised in the case of redistribution abroad when extending the FII regime. It was not decided to reshape the diversion criterion in any way other than by applying the redistribution requirement.

Also the position of the Tax Inspector that there must be a compensatory levy abroad is not accepted by the Court of Appeal. The Court did agree with the Tax Inspector that Article 10 of the Investment Institutions Decree (BBI) is a requirement for application of the FII regime in the financial years from 2008/2009. The taxpayer did not comply with this provision, as it did not record its assets at fair value at the end of the previous year, nor include its tax reserves in its profits. The Court of Appeal found that the interested party is also not open to making an adjustment in order to satisfy that condition. For that reason, the Court of Appeal ruled that the FII regime is not applicable to the financial years 2008/2009 and 2009/2010, with the result that the corresponding assessments will not be reduced either.


Source: Hof ‘s-Hertogenbosch 3 September 2021, ECLI:NL:GHSHE:2021:2629

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