VAT - real estate – essentially newly constructed – Dutch VAT Act in line with European VAT Directive?

The discussion about whether a new building can be created for VAT purposes after a conversion or a major renovation is not new. This applies in particular to the question of how to determine whether there is actually a new building after a conversion (major) renovation. Despite the fact that the Supreme Court 'recently' (November 2022) provided more clarity about the relevant criteria, the discussion on this subject is far from over. This also applies to the constant flow of case law. Below is a brief summary on this topic. Following the summary, we will discuss a recently published ruling showing that the topic is still very much alive.

New building after conversion / renovation – only after change in structural construction

For VAT purposes, an existing building can qualify as a newly manufactured building after a conversion / major renovation. This qualification is of great (financial) importance, both for VAT and real estate transfer tax. For example, if the building qualifies as new following the conversion / major renovation (or: “essentially newly constructed”), the following applies:

• By law VAT is due on the supply of the building. Parties do not have to opt for a VAT-taxed supply
• A transfer tax exemption applies to the acquisition of the building.
• There will be a new 10-year period with regard to VAT on the basis of which the actual use of the building must be monitored

The debate on how to determine whether a building has been newly constructed after a conversion / major renovation, has been going on for years and has generated a constant stream of case law.  The reason for this can be traced back to the criterion introduced by the Supreme Court in the past, namely the "essentially new-build criterion". This criterion had to be further developed in case law in order to give it substance. Since more and more sub-criteria had been introduced through case law, it became increasingly more difficult to understand how to apply all these different criteria.

Eventually, in November 2022, the Supreme Court provided more clarity on this. The most important points from this ruling are:

• The current criterion is maintained, i.e. "essentially new-build criterion"
• This criterion has been clarified in the sense that only changes in the structural construction can justify the conclusion that there is essentially a newly constructed building
• The changes in the structural construction must be so significant that "essentially a new building" has been created
• A renovation as such will not be significant enough to justify a newly constructed building
• Other factors can only be an indication that the "essentially new-build criterion" is met. This includes factors such as:
  • External appearance
  • Change in function
  • Investment value
  • Added value realised after conversion / major renovation

New case law - District Court of Noord-Holland

With the Supreme Court's ruling from November 2022, it has been clarified that we have to focus on the structural construction to assess whether the "essentially new-build criterion" is met. However, the way in which the various factors should be weighted in that assessment remains highly casuistic. From the beginning of 2023, a new stream of case law is therefore gradually emerging on this point. Recently, a new judgment was published by the District Court of Noord-Holland on this point. In this judgment, the process of weighing the various criteria can be followed step by step. The judgment clearly shows how casuistic this subject is and which facts and circumstances are verified before a judgment can be rendered, The court is also of the opinion that the work in this case did not lead to a newly constructed building.

Dutch Act OB'68 in conflict with EU VAT Directive?

In addition, this case is interesting because the appellant is also of the opinion that Dutch VAT legislation is (in short) too strict and imposes conditions that are not permitted under the European VAT Directive. Based on Dutch law, a conversion / major renovation is therefore less likely to lead to a newly constructed building. The case law of the European Court of Justice on this point shows that on the basis of the EU VAT Directive, a conversion / major renovation can lead to a newly constructed building sooner. This position has already been put forward in several court cases, but so far without result.

The Supreme Court ruled in 2022 that such a position cannot be accepted. That should be the end of the discussion on this point. However, in March 2023, the Court of Justice ruled again on this subject. This ruling can be read as confirming that Dutch legislation is too strict. That could mean that the Supreme Court's 2022 ruling will have to be reviewed. In the case before the District Court of Noord-Holland, the appellant seized the opportunity to reintroduce this topic, given the new ruling of the Court of Justice. The District Court is brief about this and rejects the position, referring to the Supreme Court's 2022 ruling. The appellant party has appealed the decision of the District Court and it is expected that the proceedings will again be litigated all the way to the Supreme Court. The subject is therefore still very much alive.

If you have any questions about this topic or if you would like to discuss the topic further, please do not hesitate to contact us at info@vatpartners.com