A hotel presents itself as a single asset, but it rarely behaves like one. Behind the entrance sit two distinct economic activities: the ownership of a building, which is real estate, and the operation of a service business, which is hospitality. These have different risk profiles, different financing logic and different tax treatment. A group that acquires or refinances European hotels, whether a single property or a portfolio spread across several jurisdictions, benefits from a structure that keeps the two activities legally and fiscally distinct. This article sets out the reasoning behind the property company and operating company split, the role of a Dutch holding, and the tax questions that arise on acquisition and in ongoing operation.
Two businesses under one roof
The property company, or PropCo, owns the freehold or long leasehold of the building and the land beneath it. It earns rent. Its balance sheet is dominated by a long-lived, financeable asset whose value moves with property yields and location. The operating company, or OpCo, runs the hotel: it employs the staff, holds the licences, carries the brand or franchise relationship, books the guests and bears the trading risk of occupancy and rate. It earns an operating margin on a service business that happens to be delivered inside PropCo’s building.
Placing both activities in a single entity is common in owner-operated properties and is not wrong, but it blends two things that markets, lenders and tax authorities treat separately. Once a group holds more than one property, or intends to bring in a lender, a franchise, or an external operator, the case for separating them becomes structural rather than cosmetic.
Why the separation matters
Operationally, the split isolates trading risk from the real estate. A claim against the operating business, an employment dispute, a licensing problem, a poor trading year, does not directly reach the building. Lenders financing the property can take security over a clean asset-holding entity whose only business is to own and let real estate. An external operator can be engaged, replaced or incentivized through a contract with OpCo without disturbing title to the asset.
Fiscally, the two activities are taxed on different bases and often benefit from different treatment. Rental income and capital gains on real estate follow the property; operating profit follows the trade. Keeping them in separate entities makes each stream visible, allows each to be financed on its own terms, and makes a future sale of either the property or the business cleaner. It also forces the relationship between the two to be documented and priced, which, as set out below, is a requirement rather than a refinement.
A hotel is not one asset but two businesses sharing an address; a sound structure respects that distinction rather than fighting it.
Lease, management agreement or franchise
Once the building and the trade sit in different entities, a contract has to join them again, and there are three standard forms. Under a lease, OpCo takes the whole operating result and pays PropCo a rent, fixed or turnover-linked; the owner has a predictable income stream and no exposure to occupancy. Under a management agreement, the owning side keeps the operating result and the operator is paid a fee, typically a base fee on revenue plus an incentive fee on operating profit; the owner keeps the upside and the risk. Under a franchise, the operator licenses the brand, the reservation system and the standards, and the owner or its own OpCo does the operating. The choice is commercial, but it changes two tax positions that are easy to overlook.
The first is VAT. The leasing or letting of immovable property is an exempt supply under article 135(1)(l) of the VAT Directive 2006/112/EC, but article 135(2)(a) expressly removes from that exemption the provision of accommodation in the hotel sector or in sectors with a similar function. Guest revenue is therefore taxable, while the rent that OpCo pays PropCo is in principle exempt unless the member state has exercised the option for taxation that article 137(1)(d) permits it to allow. An exempt rent leaves PropCo without a right to deduct the input VAT on the building and on capital expenditure, which is rarely what the parties intended when they set the rent. A management fee, by contrast, is a supply of services and is taxable, and services connected with immovable property, which article 47 expressly extends to the provision of hotel accommodation, are located where the property is.
The second is the position of the operator itself. Where an operator runs a hotel in another country under a management agreement, it is not merely invoicing from abroad: it has people, authority and a fixed place at the property. Article 5(1) of the OECD Model Tax Convention treats a fixed place of business through which the business of an enterprise is wholly or partly carried on as a permanent establishment, and article 5(5) reaches further, to a person who habitually concludes contracts or habitually plays the principal role leading to the conclusion of contracts that the enterprise routinely concludes without material modification. Article 5(6) carves out a person acting as an independent agent in the ordinary course of its business, but that carve-out is closed where the person acts exclusively or almost exclusively on behalf of one or more enterprises to which it is closely related. A group operating arm managing the group’s own hotels is precisely that case, so the independent agent exception is not available to it and the operator should expect a taxable presence where the hotel is. We set out the general test in our note on permanent establishment.
Holding the assets through a Dutch entity
Where a group owns hotels in more than one country, a common ownership layer is useful. A Dutch holding company can sit above the national PropCos and OpCos, consolidating ownership, financing and cash flows. The Netherlands is used for this role because of its treaty network, its established company law, and the participation exemption of article 13 of the Wet op de vennootschapsbelasting 1969, under which the benefits derived from a qualifying shareholding, in principle one of at least five per cent of the nominal paid-up capital, are left out of account in determining the holding’s profit. We explain the mechanics of that regime in our note on the participation exemption.
The holding does not make the underlying real estate Dutch for tax purposes, and it is not intended to. Its function is to own shares, receive and on-lend capital, and distribute returns to the ultimate investors. For the exemption and treaty access to hold up, the holding must have genuine substance: real decision-making, appropriate people and premises, and board functions actually carried out in the Netherlands. A holding that exists only on paper is exposed under anti-abuse rules and under the substance conditions attached to treaty and directive relief.
Financing the acquisition and the interest limitation
Hotel acquisitions are typically funded with a mix of equity and debt, and the debt may be external bank financing, related-party lending from the holding, or both. The tax treatment of interest is where the financing structure meets the limitation rules. The earnings-stripping rule derives from article 4 of the Anti-Tax Avoidance Directive (EU) 2016/1164, which caps deductible exceeding borrowing costs at thirty per cent of the taxpayer’s earnings before interest, tax, depreciation and amortisation and allows member states to set a floor of up to three million euros below which the cap does not bite. The Netherlands implements the rule in article 15b of the Wet op de vennootschapsbelasting 1969 and implements it more tightly than the directive requires: the balance of interest is not deductible to the extent it exceeds the higher of 24.5 per cent of the corrected profit or one million euros. Interest above the cap is disallowed in the year and carried forward to later years, in the order in which the disallowed balances arose.
In hospitality this bites harder than the headline suggests, because hotel acquisitions are leveraged against an asset whose income is service income and therefore cyclical. Loading debt into a PropCo with strong, stable rental earnings behaves differently from loading it into an OpCo whose earnings move with occupancy and rate, and a single weak year can push interest over the cap in the entity that can least afford it. Related-party loans must in addition be priced at arm’s length and must be commercially genuine; interest that survives the earnings-stripping test can still be challenged on pricing or on substance grounds. The interaction of these rules is set out in our note on the interest deduction limits under ATAD. The general rate against which any disallowance should be weighed is the Dutch corporate income tax rate, which under article 22 of the same act is 19 per cent on the first 200,000 euros of taxable profit and reaches 25.8% in the top bracket.
VAT on the purchase
The VAT treatment of a hotel acquisition depends on what is bought and how. An asset purchase of the building is treated differently from a share purchase of the entity that owns it. Where the transaction is structured as the transfer of a going concern, article 19 of the VAT Directive allows member states to treat the transfer of a totality of assets or part thereof as no supply at all, with the recipient treated as the successor to the transferor, which avoids a cash-flow charge but carries its own conditions and clawback risk. Where VAT does apply, the questions are whether an option to tax the supply is available and sensible, whether the buyer can recover the input VAT given its intended use of the property, and how any adjustment period on capital goods is inherited. That last point is not marginal for a hotel: article 187 spreads the adjustment over five years for capital goods generally and lets member states extend it to as much as twenty years for immovable property acquired as capital goods, so a change of use years after completion can still reopen the deduction. These points turn on the law of the country where the hotel sits, not on the residence of the holding, and they should be settled in the sale agreement rather than discovered afterwards.
Transfer tax on the acquisition: asset or shares
Alongside VAT sits the transfer tax on the acquisition itself, and here the choice between buying the building and buying the company that owns it is decided by anti-avoidance rules that differ in construction from one country to the next. Two examples show how far apart they are.
In Spain, the rule is no longer the much-cited article 314 of the repealed consolidated securities market act, which Ley 6/2023 replaced. The operative provision is now article 338 of Ley 6/2023, de 17 de marzo, de los Mercados de Valores y de los Servicios de Inversión. Its first paragraph exempts transfers of securities from VAT and from transfer tax and stamp duty. Its second paragraph withdraws that exemption for transfers, in the secondary market, of securities not admitted to trading on an official secondary market, where the transfer of securities was used to avoid the tax that would have applied to a transfer of the immovables owned by the issuing entity, in which case the transaction is taxed as a transfer of immovable property for consideration. The paragraph then adds a presumption that is expressly rebuttable, since it applies only where there is no evidence to the contrary, and it lists three situations that trigger it. The first is the acquisition of control of an entity at least fifty per cent of whose assets consists of immovables located in Spain that are not affected to business or professional activities, or an increase in the holding once control has been obtained; control means, for commercial companies, a direct or indirect interest of more than fifty per cent of the share capital. The exclusion of property affected to a business activity is what makes this provision workable in hospitality, since a hotel that is actually being operated is normally affected property, but the general rule in the second paragraph stands on its own and the burden of showing the commercial purpose falls on the taxpayer.
In the Netherlands the test is built differently and, importantly, cumulatively. Article 4 of the Wet op belastingen van rechtsverkeer treats shares as deemed immovable property where the entity’s assets, at the time of acquisition or at any time in the preceding year, consist for the greater part of immovable property and at the same time at least thirty per cent of those assets consists of immovable property situated in the Netherlands, provided that the properties taken as a whole serve wholly or mainly the acquisition, disposal or exploitation of those properties. Both conditions must be met, not one: a predominantly property-owning company whose Dutch property falls below the thirty per cent mark is outside the provision, and so is a company holding Dutch property above that mark whose assets are not predominantly real estate. A third condition sits in the following paragraph, since tax is charged only where the acquirer reaches a stated interest, at least one third for a legal person. Where the article does apply, the general rate of 10.4 per cent set by article 14 of the same act governs, the reduced rate for dwellings being irrelevant to a hotel. Our note on Dutch real estate transfer tax takes the share deal question further.
Pricing the agreements between PropCo and OpCo
Once PropCo and OpCo are separate entities under common ownership, the contracts between them are related-party transactions and must be priced accordingly. Under a lease, OpCo pays PropCo rent for the use of the building; under a management agreement, an operator, which may be a group company or a third party, is paid a fee to run the hotel. Both the rent and the management fee are prices between associated enterprises, and both must reflect what independent parties would agree.
This is a transfer pricing obligation, not a matter of preference. In the Netherlands it rests on article 8b of the Wet op de vennootschapsbelasting 1969, which provides that where conditions are agreed or imposed between associated bodies that differ from those independent parties would have agreed in the open market, the profit of those bodies is determined as if the arm’s length conditions had been agreed. The provision carries no revenue threshold at all, and its third paragraph adds a standing obligation to keep in the accounts the information showing how the transfer prices came about and whether they meet the arm’s length standard. That obligation applies to a two-company hotel structure exactly as it applies to a multinational, as we set out in our note on the Dutch transfer pricing obligation.
The rent set between PropCo and OpCo determines how the total profit of the hotel is divided between the real estate return and the operating return, and therefore between two potentially different tax bases and jurisdictions. A rent set too high starves the operator; set too low it undercompensates the asset. The defensible figure is supported by a functional analysis and by comparables, and it must be documented. Formal documentation comes on top of the general rule once a group is large enough. Article 29g of the same act requires a Dutch group entity to include a master file and a local file in its accounts within the corporate income tax return deadline, and that requirement applies to groups whose consolidated group revenue in the preceding reporting year reached at least 50 million euros. Country-by-country reporting sits higher: article 29c does not apply to groups whose consolidated group revenue in the preceding reporting year was below 750 million euros. Our overview of these obligations is set out under transfer pricing.
Where the income is taxed
Real estate is taxed where it sits. This is one of the most settled principles in international tax, and it is written into article 6 of the OECD Model Tax Convention: income derived by a resident of one state from immovable property situated in the other state may be taxed in that other state, and the rule applies expressly to income from the direct use, the letting, or the use in any other form of immovable property, and equally to income from immovable property of an enterprise. A Dutch holding above a French, Spanish or Italian hotel does not move the taxing right over that hotel’s rental income or land gain out of France, Spain or Italy. The operating business is likewise taxed where it is carried on, through the local OpCo or, if run cross-border, through a permanent establishment in the country of operation.
That is the limit on what any ownership structure can achieve, and it deserves stating plainly. However the contracts are drawn, the primary tax on the hotel’s income stays in the country where the hotel stands, and the amount that can legitimately land in the holding is bounded by the functions, assets and risks the holding actually carries. What the structure organizes is the ownership, the financing and the flow of after-tax returns upward to the holding and onward to investors. Distributions from the Dutch holding may attract dividend withholding tax, which article 5 of the Wet op de dividendbelasting 1965 sets at 15% of the proceeds, subject to reduction under treaties or the relevant EU directive. Large groups must also weigh the global minimum tax introduced by Council Directive (EU) 2022/2523, which sets the minimum tax rate at fifteen per cent and applies to constituent entities of groups with annual revenue of 750 million euros or more in the consolidated financial statements of the ultimate parent in at least two of the four preceding fiscal years.
A worked example
Consider, purely for illustration and with no figures presented as market data, a group acquiring a single hotel in a European city. A Dutch holding incorporates two national subsidiaries: PropCo acquires the building, OpCo takes on the operation. The purchase price of the property is funded partly by equity injected by the holding and partly by a bank loan taken at PropCo level, secured on the asset. OpCo signs a lease with PropCo and, separately, a management agreement with the group’s operating arm.
The rent under that lease is set by functional analysis so that PropCo earns an arm’s length return on the real estate and OpCo retains an arm’s length operating margin, and the analysis is kept in the accounts because article 8b requires it whatever the size of the group. PropCo’s rental profit, net of deductible interest within the earnings-stripping cap, is taxed in the country where the hotel stands. OpCo’s operating profit is taxed in the same country, and the group’s operating arm accepts that its management activity at the property is likely to give it a taxable presence there too, since it acts only for group companies and cannot rely on the independent agent exception. Dividends paid by both subsidiaries up to the Dutch holding fall, where the conditions are met, within the participation exemption and are not taxed again at that level. When the holding distributes to its investors, Dutch dividend withholding tax of 15% applies unless reduced by treaty. Nothing in the structure removes the local tax on the hotel; what it does is make each return visible, financeable and cleanly transferable, while keeping the related-party pricing defensible if it is examined.
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This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.