REAL ESTATE AND REPORTING IN ACCORDANCE WITH DUTCH GAAP AND EFFECT ON CORPORATE INCOME TAX ACT 1969
By Ronald Krol, EJP Accountants & Adviseurs
When reference is made to real estate within the Dutch reporting rules on property, the (intended) use should be distinguished for property for own use (Guidelines for annual reporting hereinafter referred to as: RJ 212) and investment property (RJ 213 / Guidelines for annual reporting for small legal entities, hereinafter referred to as: RJk B2).
Until January 1st 2019, the way in which the real estate of corporate income tax was treated, the intended use was approached differently, in particular the allocation of depreciation charges charged to the taxable profit base.
With regard to real estate for own use, valuation must be carried out on first processing in accordance with the cost model or the current value model, whereby any impairment losses must be taken into account. Applying the cost model, the asset is valued at cost price less (cumulative) depreciation, whereby the expected pattern of use must be taken into account, this must be done systematically, starting at the moment of making available for use and ending with decommissioning or disinvestment.
As far as current value is concerned, the current cost price is reduced with (cumulative) depreciation, value in use or direct realizable value, while taking into account that for the determination of this value this must be performed regularly. Revaluation through revaluation will have to be at all times through equity unless it is a reversal of a write-down in the past charged to the profit and loss account. The concept of current cost price, which means the current purchase price or manufacturing price differs from the concept of replacement value used in the past. The essential difference here is that the concept of actual purchase price or manufacturing price looks at the asset as held by the legal entity and replacement value looks at the value of replacement asset with an equivalent function from an economic point of view. This difference in value concept has led to a change in accounting policy from the beginning of January 1st , 2016 (RJ 140).
With regard to investment property, the first valuation is the acquisition price, including the expenses attributable to it. Consideration should be given to transaction costs, transfer tax and the associated tax-, legal- and advisory costs. Any expenses after activation, in so far as economic benefits can be expected in the future, must also be capitalized. For investment properties, a choice can be made for current value (provided for the entire category of investment property). Irrespective of the valuation method chosen, the fair value of the investment property must be determined according to RJ 213, or the valuation in the balance sheet or the explanatory notes if the acquisition price has been chosen, whereby the use of an independent and expert appraiser is strongly recommended. Depreciation does not occur at fair value and changes in the fair value have to be charged to the profit and loss account, whereby a formation of a revaluation reserve (per object) is charged to the other reserves, whereby this must be determined per object. to become and netting is not possible. Depreciation at fair value does not take place. Likewise, the formation of a maintenance provision is not permitted.
With regard to costs for major maintenance, the costs for major maintenance can only be processed from the financial year starting on or after 1 January 2019: a. In the book value of the relevant fixed asset, which often has a different useful life than the remainder of the asset and as a result a separate item to be depreciated arises. Any component to be replaced will be divested accordingly (this so-called component approach must be applied from the first processing of the asset); b. via the maintenance provision, whereby additions to this provision are determined on the basis of an estimate of costs. Any additional costs can be paid through the profit and loss account (RJ 212.445 and 212.448). Approach a is a prospective change in accounting policy, with approach b being a retrospective change in accounting.
In the context of auditing standards, external experts are often called in to determine the current value. Standard 620 'use of the engaged expert' is relevant here in which an assessment must take place of the nature and level of expert, capacities both qualitatively and quantitatively and the objectivity, insight into assumptions, methods and source data and evaluation of findings and conclusions. This is part of the auditor's work and audit file.
Looking from a tax perspective, the starting point for valuation and depreciation is Article 3.30 of the Income Tax Act 2001 (hereinafter referred to as IB Act), in which depreciation takes place on the acquisition or production costs, including all additional costs including costs for preparing the work, financing costs for the purchase moment. According to art. 3.30 paragraph 2 of IB Act a law fiction is applied that the annual depreciation is limited to 20% of the acquisition costs, which is determined by means of a link clause art. 8 Corporate income tax Act also applies in the corporate sphere. Possible devaluation to lower operating value (highest value between direct or indirect realizable value) is possible, which results from the principle of prudence from "good merchant use". With regard to depreciation, it is relevant to look at the probable (economic) operating time with due regard for residual value. With regard to the residual value of buildings, under the law art. 3.30a paragraph 1 of the IB Act becomes a fundamental difference. For this, the so-called 'bottom value' is used for the residue value, the bottom value being the minimum book value to be taken into account. Until Januari 1st, 2019, the tax base value for real estate in own business was 50% of the value as determined in accordance with the Valuation of Property Act (hereinafter referred to as: WOZ) and 100% for investment property. If on the basis of the WOZ the value should fall below the bottom value, depreciation should be discontinued, whereby revaluation to land value is not discussed. As from January 1st, 2019, the limitation on depreciation, whereby the minimum book value is used as the floor value, has been increased for companies in private use from 50% to 100%.
With regard to whether a property is held for investment or personal use, it may differ from a fiscal point of view. Fiscally, the concept of investment becomes both for direct and indirect leasing in "essential", which means that at least 70% or more is leased. For the financial statements, the qualification must be assessed on the basis of RJ 940: real estate which is held to generate direct income through rent or value increase which may also arise on the basis of RJ 213.113 company and consolidated difference of interpretation.
Insofar as there is no option or cannot opt for the preparation of annual accounts on tax bases, in accordance with art. 2: 396 paragraph 6 of the Dutch Civil Code and the Decree on tax accounting principles (BFW), the aforementioned differences (interpretation of investment property and real estate in own use, application of bottom value as the minimum book value as well as the treatment of maintenance costs) lead to temporary valuation differences in assets that have to be expressed in the annual accounts through a deferred tax position. This will, rather than the past, be more the rule rather than the exception. For the taxable or deductible temporary differences, a passive or deferred tax liability is assumed for future realization or settlement of assets (property valuation) or liabilities (revaluation reserve or maintenance provisions). (RJ 272.301, RJ 272.306 and RJ 272.310.) In cases, both active and passive latencies could arise in connection with real estate. The elements that play a role in the valuation of these deferrals are the most current tax rate of the realization or settlement of such items (RJ 272.403). The choice to value the deferred tax at nominal or present value is based on the simultaneous systematicity, in other words whether all deferred taxes on nominal value or on present value (RJ 272.405), with the exception of short term deferred tax liabilities, which may be valued at nominal value. appreciated. Offsetting is only possible if these latencies would lead to simultaneous settlement, looking at the nature and duration. The assessment of the book value of the deferrals must be made again every balance sheet date. Any annual adjustment of the carrying amount is reflected in a tax expense or -income.
Ronald KrolEJP Accountants & Adviseurs, ‘s-Hertogenbosch, The Netherlands
T: +31 73 850 72 80
EJP Accountants & Adviseurs are auditors, advisers and challengers. Their 40 auditors and international tax lawyers have a wide range of expertise. Their main fields of expertise are Dutch corporate and personal income tax, international taxation, Dutch royalty, interest and dividend withholding tax, estate planning and wage tax. They have an AFM license to perform audits for the larger midsized companies.
Ronald Krol is managing senior accountancy, specialised in SME firms both international and national. During his 25 years’ experience he has gained expertise in reporting, compliance, tax related aspects, MIS and finance aspects.
Published: March 2019 l Photo: Mediagram - stock.adobe.com