Buying a property company instead of a property is common in Europe, and it is usually the seller’s idea. The reason is transfer tax: in several jurisdictions a share transaction can carry a materially lower cost than a transfer of the asset. That saving is real, and so is what the buyer takes on in exchange, which is everything else the company has ever done.
The buyer inherits the history
An asset purchase transfers a building. A share purchase transfers a company, and with it every tax return it has filed, every contract it has signed, every employee it has employed and every dispute it has had or may yet have. A company incorporated for a single acquisition three years ago carries little history; a company that has traded for twenty years carries a great deal, and the diligence required is correspondingly different.
The difference is one of selection. An asset buyer takes the title and the leases it wants. A share buyer takes the whole balance sheet and everything that never reached it, including obligations nobody has yet asserted, which therefore produce no document for a data room. Scope follows what the company has done, not the building’s condition, which puts this closer to legal due diligence before buying a European business than to a property report.
The tax base usually falls
In an asset deal the buyer typically acquires the property at a new, higher base cost for future depreciation and future gains. In a share deal the company’s existing base cost usually carries over, which means the buyer inherits a latent gain that will crystallize on a future sale. That deferred cost has a present value, and a buyer accepting a share deal without pricing it has paid the seller’s transfer tax saving without receiving a share of it.
Pricing it means the gap between market value and carried-over book value, at the rate expected when it crystallizes, discounted over the hold. The Dutch step-up is worth less than it looks in any event, because article 3.30a of the Wet inkomstenbelasting 2001 allows depreciation on a building only where book value exceeds its WOZ value, and article 8 of the Wet op de vennootschapsbelasting 1969 extends that to companies. A higher cost base often produces no extra annual deduction at all, only a smaller gain later.
A share deal saves the seller’s tax today and hands the buyer someone else’s history and someone else’s tax base. Both belong in the price.
Anti-avoidance rules across Europe
Tax authorities anticipated this. Several jurisdictions apply rules that treat a transfer of shares in a company whose value derives principally from real estate as a transfer of the real estate itself, at least for transfer tax purposes. The Netherlands has specific rules in this area, set out in our note on Dutch real estate transfer tax and the share deal question, and Spain applies its own long-standing provision. Assuming a share deal avoids transfer tax, without checking the specific national rule, is one of the more expensive assumptions available.
Germany arrives by another road. Under sections 1(2b) and 1(3) of the Grunderwerbsteuergesetz, the tax falls where at least ninety per cent of the shares in a company owning German land pass to new shareholders within ten years, or are united in one hand. There is no asset ratio test at all: one German plot is enough, as our note on the German share deal threshold sets out.
Spain works through a rebuttable presumption, and the provision has moved: what is still called article 314 now sits in article 338 of Ley 6/2023 on securities markets and investment services. Securities transfers are exempt, but avoidance is presumed, subject to proof to the contrary, where control is obtained of an entity whose assets are at least fifty per cent Spanish real estate not affected to a business activity. Note the polarity: Spain excludes property used in a trade, while the Dutch test requires that it serve the exploitation of property.
How the threshold is actually counted
Under article 4 of the Wet op belastingen van rechtsverkeer, shares count as immovable property where the company’s assets consist for the most part of real estate and at least thirty per cent of them is real estate situated in the Netherlands, provided that real estate wholly or mainly serves the acquisition, disposal or exploitation of real estate. A second gate applies to the buyer: the charge arises only where a corporate acquirer reaches a one third interest, or an individual reaches a third with close family and connected bodies and holds more than seven per cent.
The test applies at the moment of acquisition or at any moment in the preceding year, which kills the obvious manoeuvre of injecting cash before signing. Assets and liabilities of any body in which the company holds at least a third are attributed proportionally. Receivables owed by the buyer or connected parties drop out of the count unless they arise from normal business activity, and non-property assets are treated as financed by debt owed to the buyer. Acquisitions within two years by the same buyer count as one.
The base is the point most often misread. The value of the shares for this tax is the value of the property they represent, not the price paid and not net of the company’s debt, so a leveraged company with thin equity still produces a base equal to the gross property value. The general rate is 10.4 per cent, 8 per cent for a dwelling and for shares to the extent they relate to one, and the two per cent owner-occupier rate is unavailable on shares. The tax is paid on a return, which puts the filing on the buyer.
VAT does not switch off with the transfer tax
The two taxes interlock. Under article 11 of the Wet op de omzetbelasting 1968 a supply of a building before, on or within two years of first occupation is taxable, as is a supply of building land, while later supplies are exempt unless the parties elect to tax. New property is a VAT asset; older property is not.
Where VAT is due on a new building or on building land, and not on a supply the parties have opted to tax, article 15 of the transfer tax act exempts that same acquisition from transfer tax. The exemption falls away where the property has already been used as a business asset and the buyer can deduct, and comes back only where the acquisition falls within six months of first occupation or of the earlier start of a letting. Subject to that, the concurrence exemption is why an asset deal in new property carried one tax and not two, and selling the shares was the way to carry neither.
The gap is now closed. The exemption is disapplied on an acquisition of shares in a property company where not applying it means new immovable property is taxed indirectly, and to the extent that property is used, for at least two years after the acquisition, for activities carrying less than a nearly full right of deduction. Four per cent then applies. A share deal in a new building destined for residential letting or healthcare no longer walks away clean, and the two year test means the answer is not fixed at completion. The company’s VAT position travels with it, as our note on Dutch VAT for international holding companies sets out.
Diligence has to cover the company, not the building
Share deal diligence adds corporate, tax, employment and litigation review to the property review. The tax history matters most: open periods, positions taken, deductions claimed, transfer pricing on any intragroup arrangements. A buyer should also establish whether the company has ever had other assets or activities, since those leave liabilities behind long after the assets are gone.
Group membership leaves no trace in the property file and is the exposure most often missed. Under article 39 of the Invorderingswet 1990 every subsidiary that is or was part of a Dutch corporate income tax fiscal unity is jointly and severally liable for the tax levied from that unity, and article 43 does the same for VAT groups, where liability runs until the inspector is told in writing that the unity has ended. A company that spent four years inside a group arrives carrying liability for tax that has nothing to do with its building.
The notary does not disappear either. Dutch property passes by notarial deed and registration in the public registers, and a share in a BV by deed before a notary established in the Netherlands, with the checks described in our note on why the Dutch notary asks for everything.
Protecting the buyer
The protections are warranties and indemnities, an escrow or price retention, and increasingly warranty and indemnity insurance, which allows a seller to exit cleanly while giving the buyer a claim against an insurer rather than against a distributed shareholder. Specific known risks belong in specific indemnities rather than in general warranties, because a general warranty against a disclosed risk is worth nothing.
Sizing and duration decide whether it works. A retention calibrated to the equity price is the wrong measure when the exposure is a transfer tax base computed on gross property value, or a secondary liability for a former group’s tax. Insurance does not fill the gap either, since policies exclude what the diligence found and commonly exclude secondary tax liabilities and transfer pricing, as our note on a tax structure that does not hold up in due diligence shows.
Choosing between the two
The right structure depends on the company’s history, the size of the latent gain, the transfer tax differential and the buyer’s own position. A clean single-asset company with a recent base cost is straightforward. A long-trading company with a low base cost and an untidy history may be worth buying only as an asset, whatever the transfer tax. The debt structure over the acquisition is a related question, covered in our note on debt or equity in real estate through a Dutch BV.
The financing bank often settles the argument. In an asset deal the lender takes a first ranking mortgage over a title cleaned at completion, from a borrower with no past. In a share deal it lends against a company that has one, so its credit committee prices the same inherited liabilities, and those rank ahead of it on an insolvency. A pledge over the shares sits behind the company’s own creditors, which leaves the mortgage as the real security. Existing facilities usually fall due on a change of control, and a bank will refinance rather than assume a loan it did not underwrite, as our note on what Dutch lenders require from a foreign borrower explains.
The last input is the exit. A buyer who takes shares holds the same conversation in reverse on sale, before a narrower pool of buyers, which is the other side of our note on selling the property company instead of the property. That belongs in the acquisition model, not in a later note on exiting a European real asset.
Montclare manages and structures European real assets for institutional and private investors, from acquisition through to exit. Our services are set out on our services page.
This article is informational and does not constitute investment, tax or legal advice. Asset management and investment advice are regulated activities and the treatment of any transaction depends on its facts. Each engagement is subject to scope and applicable regulation.