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25 March 2019 / article

Question referred to the Court of Justice for a preliminary ruling on a one-off VAT adjustment

In December 2018, the Supreme Court referred a preliminary question to the Court of Justice concerning the adjustment system for the deduction of VAT under Dutch law.

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Question of law and importance

In the present case, a foundation had seven residential apartments built on its own land, four of which were rented out exempt from VAT. During the construction period, the foundation had deducted the VAT on the construction costs because the building was intended to be used for VAT-taxed purposes. In accordance with Dutch VAT rules, the foundation adjusted the full VAT deduction in respect of these four apartments when they were taken into use for rent exempt from VAT. The foundation then objected to the payment of the VAT.

At dispute is whether the adjustment system in Dutch law is in line with the VAT Directive. The Supreme Court wonders whether, in the case of capital goods that fall under the adjustment system (such as immovable property), the adjustment of the full right to deduction at the time of first occupation is permitted on the basis of the VAT Directive. According to the Supreme Court, it would be reasonable to interpret the VAT Directive in such a way that it offers the possibility for a one-off adjustment upon occupation, in accordance with the Dutch regulation. Since the Supreme Court considers that this is not without doubt, it has referred a question to the Court of Justice for a preliminary ruling.

Practical implications

If the Court of Justice were to follow the foundation's position and rule that the adjustment of the deduction for a capital item at the end of each year of adjustment, i.e., also at the end of the first year of adjustment, may only be made for a proportional part of the VAT, this could lead to major timing advantages or disadvantages with regard to the adjustment of the VAT deduction on the completion or delivery of real estate.