Dutch Supreme Court asks CJEU about VAT on sale of property

The transfer of a leased property can, for VAT purposes and under certain circumstances, be regarded as a totality of assets which is outside the scope of VAT ('TOGC'). In that case, no VAT is due on the supply of the property, but the real estate transfer tax ('RETT') exemption may still be applied. In practice, there is uncertainty about the application of this TOGC-doctrine to the supply of a leased property by a property developer. The Supreme Court has now raised questions on this point to the Court of Justice of the EU ('CJEU').

Background

The case concerns a property developer that purchased an existing (office) building in 2015, intending to convert it into residential apartments. In the following months, lease agreements (of at least one year) were prepared and concluded, as well as various rental, management, and administration agreements with third parties. During the construction, the developer confirmed to the tax inspector that, after completion, the entire apartment complex would be sold to an investor. After completion, on 1 August 2017 virtually all apartments were inhabited by tenants, after which the property was transferred in a leased state to an investor on 15 November of that same year. The inspector assessed additional VAT due on the transfer of the property.

According to the District Court, it was not plausible that the property served the seller as a capital asset intended to operate a business and yield a lasting return. The District Court did not consider the seller to transfer a business. The Court of Appeal, however, held that at the time of the transfer there was an autonomous business, because the leasing had already started before the sale took place and the related management and service activities had been put in place. According to the Court of Appeal, the buyer continues the business of renting out apartments and taking on all related obligations.

The State Secretary argues that the Court of Appeal’s judgment is incorrect because the interested party is in fact a property developer who does not conduct a rental business on a lasting basis, but rather aims to sell real estate. Advocate General (A-G) Ettema, however, concluded that in this case there can also be a transfer of a totality of assets. After all, the property developer entered into lease contracts for a longer period of time and the buyer intends to continue the the leasing activities. According to the A-G, the TOGC conditions are met if the leasing activities are transferred and continued.

Supreme Court

According to the Supreme Court, this discussion cannot be resolved from a mere Dutch VAT perspective and therefore it approaches the case from two interrelated EU-law questions that are decisive for the outcome.

First, the Supreme Court asks whether Article 19 of the VAT Directive, on which the Dutch TOGC provision is based, also extends to transfers of properties used solely for exempt leasing activities and for which no right to recover input VAT exists. This is relevant as Article 136 of the EU VAT Directive in prescribes a separate exemption for supplies of such goods used for exempt transactions. The Supreme Court acknowledges that the Netherlands has not implemented Article 136 of the EU VAT Directive for transfers of immovable property, but implies that this provision may nevertheless apply. What the Supreme Court, strikingly, does not mention is that if Article 136 of the VAT Directive applies, the RETT exemption should no longer apply.

The Supreme Court then discusses its second core question: if Article 19 also extends to this type of transfer, what is the correct test for a “transfer of a totality of assets” in the case of immovable property? The Supreme Court observes that, given the current state of the law, this question cannot be answered with certainty and therefore refers it to the CJEU: is it sufficient that the property is transferred in a leased state and that the necessary lease and service agreements have been concluded, or must one also look at the seller’s intention and the nature of the seller’s activities? After all, this developer leases the apartments only briefly with the actual aim of facilitating the subsequent sale. If the intention is relevant, the Court of Appeal’s judgment cannot stand and the case may be remitted to another Court of Appeal.

What does this mean for your organization?

In practice, there are ongoing discussions as to whether the sale of (re)developed real estate by a developer after a short leasing period should be regarded as the sale of “inventory” or as the transfer of a totality of assets. After all, the TOGC provision does not apply to the mere sale of inventory. It is therefore welcome news that the CJEU may provide more clarity on this point.

It is very surprising that the Supreme Court implies that the sale of a (new) residential complex in a leased state is exempt under Article 136(a) of the EU VAT Directive, considering that such a supply would typically be subject to VAT under Article 11(1)(a)(1) of the Dutch VAT Act (Wet OB). If in that scenario VAT is not charged based on the TOGC application, it has been approved in a Dutch Decree that the RETT exemption may nevertheless be applied subject to conditions. If Article 136 of the VAT Directive were to take precedence, this could be disadvantageous because in those cases the RETT exemption would not (or no longer) apply.

Are you engaged in property development and do you (partially or fully) perform leasing activities in this process? Then it is important to map out the possible VAT and RETT consequences of this case. For more information, please reach out to your PwC advisor.