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06 December 2019 / article

A combined purchase and construction agreement does not qualify as a delivery of a construction site for VAT purposes

The Court of Justice ruled in the KPC Herning case that the delivery of a plot of land containing a warehouse that could still be used at the time of delivery does not qualify as the delivery of a construction site. The fact that the property is demolished by the buyer after delivery and then a new building is delivered by the vendor does not stand in the way of this judgment.

KPC operates as a property developer and has received the site and warehouse from the local port authority. This delivery is subject to the condition that KPC must enter into an agreement with a housing association to develop housing for young people on the site. KPC has sold the site and warehouse to the housing association, which has the warehouse demolished by a third party. The condition for the latter sale is that KPC would design and build the houses (after demolition).

Question of law

The dispute is whether both deliveries are exempt from VAT. The Danish court asked the Court of Justice whether the deliveries in question can be regarded as the delivery of a construction site because the parties intend to demolish the existing building to make way for the proposed new building.

Assessment by the Court of Justice

The Court of Justice ruled that both deliveries are exempt from VAT. Both deliveries constitute independent transactions in relation to the subsequent transactions carried out by KPC (building of new homes) and the housing association (demolition of the old building). The fact that the delivery, the demolition and the building of the new homes are closely linked by contract cannot establish a link in such a way that the various operations can be regarded as a single, indivisible economic performance. The transactions should therefore be split in accordance with the general rule.

Practical implications

In the Don Bosco judgment, the Court of Justice ruled that the sale of an existing building in which the vendor also undertakes towards the buyer to demolish the existing building (combined purchase and demolition contract) must be regarded as one composite supply: the delivery of undeveloped land. This Don Bosco doctrine can also be applied to a combined purchase and construction agreement. In such a case, the composite supply constitutes the delivery of a new building. The present case shows that the Don Bosco doctrine does not apply in all cases and that, in principle, combined purchase and construction agreements must be assessed separately. The fact that in this case the combined purchase and construction agreement does not lead to a composite supply seems to be motivated in particular by the fact that the demolition is carried out not by KPC, but by the buyer. The Court of Justice also seems to attach importance to the condition of the existing buildings at the time of delivery. The framework of agreements and the facts of a transaction therefore have a major impact on the chargeability of VAT and real estate transfer tax.

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