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 incentivised 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.
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, under which qualifying dividends and capital gains from subsidiaries are exempt at the level of the holding. 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. Under the earnings-stripping rule derived from the EU Anti-Tax Avoidance Directive, a company’s deductible net interest is capped by reference to a percentage of its fiscal earnings before interest, tax, depreciation and amortisation, subject to a de minimis floor below which the cap does not bite. Interest above the cap is disallowed in the year and may be carried forward.
This has direct consequences for how an acquisition is geared. Loading debt into a PropCo with strong, stable rental earnings behaves differently from loading it into an OpCo with volatile trading earnings. 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 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, it may fall outside the scope of VAT altogether, 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. 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.
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. Two agreements typically govern the relationship. 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. 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. Groups above the relevant thresholds face formal documentation requirements: a Master File and Local File where consolidated revenue exceeds 50 million euros, and country-by-country reporting above 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: income from immovable property, and gains on its disposal, are taxable in the country where the property is located, regardless of where the owning entity is resident. 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.
The structure therefore does not relocate the primary tax on either activity. What it organises 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 at 15%, subject to reduction under treaties or the relevant EU directive, and large groups must also weigh the global minimum tax of 15% that applies from 750 million euros of consolidated revenue under Pillar Two.
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. 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. 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.
Montclare structures and operates Dutch and cross-border platforms for international groups. Our services are set out on our services page.
This article is informational and does not constitute tax advice. Each engagement is subject to scope and applicable regulation.