European Court rules on meaning of ‘building land’ for vat purposes
On 4 September 2019, the European Court of Justice (the ‘CJ’) delivered its judgment in the case KPC Herning (C-71/18). KPC Herning (‘KPC’) is a Danish project development and construction company which develops property projects and carries out construction work under turnkey contracts in Denmark.
In the fall of 2013, KPC purchased a plot of land, with an existing (still operational) warehouse on it, from the Port of Odense in Denmark. The purchase contract was subject to a number of conditions, including the condition that KPC was to conclude a contract with a low-rent housing body for the purpose of a social housing project for young persons. Thereafter, KPC sold the land to a company called ‘Boligforeningen Kristiansdal’ (‘BK’). From the contracts concluded with respect to the sale of this land, it was apparent that the sale was subject to the condition that KPC undertakes to build and provide (turnkey) social housing units. Particularly, KPC was required to ‘supply a fully completed building for residential use’. However, BK was required to carry out the (partial) demolition of the existing warehouse at its own expense and risk.
These facts and circumstances led to a dispute that eventually came before the ‘Vestre Landsret’ (the High Court of Western Denmark). The Danish Ministry of Taxation argued that under Danish law, the land classifies as ‘building land’ given that the intention of the parties involved for the land to support a new building is decisive for VAT purposes. KPC, on the other hand, argued that land which has a building on it cannot be classified as building land except for specific conditions such as in the case of Don Bosco (C-461/08). In that case, the vendor was still responsible for the demolition of an existing building in order to supply bare land as part of a composite service.
The High Court stayed the proceedings and referred a question to the CJ for a preliminary ruling. By its question, the referring court asked whether a supply of land that includes a building should be considered the supply of ‘building land’ provided that it is the parties’ intention that the building is wholly or partly demolished to make room for a new building.
The CJ ruled that the first sale of the land, from the Port of Odense to KPC, is distinct and independent from the second sale of the land, from KPC to BK, including in particular the demolition of the warehouse. Thus, the first transaction classified as a supply exempt from VAT which is separate from the VAT taxed construction services of KPC for the social housing corporation. As to the second sale of the land, the CJ considered that the warehouse
was still operational and that, after the supply of the land, KPC was in no way involved in the partial demolition of the warehouse. Taking into account the aforementioned facts and circumstances, the CJ concluded that, subject to review by the referring Danish court, the demolition of the warehouse is an act independent of the sale of the warehouse and does not constitute, together with that sale, a single economic supply, despite the economic link between each of the acts in question and the common objective pursued by the parties. Consequently, the second sale by KPC to BK is also exempt from VAT.
Patrick VettenburgSenior associate Tax adviser
Patrick Vettenburg, tax adviser, is a member of our Indirect Tax practice Group in our Rotterdam office with a focus on corporate VAT, audits and the VAT aspects of international trade of goods and services.T: +31 10 224 66 51 M: +31 6 13 06 82 79 E: email@example.com