General VAT rule

As a general rule, the transfer of a newly built property within two years after first use is subject to VAT. Dutch case law allows the transfer of a going concern regime for leased real estate. Under this regime, no VAT is charged on the purchase price, which is beneficial when the property is let VAT exempt.

Grey area for developers

The scope of this regime becomes unclear when a property developer, rather than an investor, transfers a newly built and recently leased property to an investor. In an earlier case, the Court of Appeals ruled that the transfer of a leased office building by a developer did not qualify as a transfer of a going concern. The Court considered the transaction a sale of stock by the developer, noting that the developer never intended to operate the building and aimed to sell it before first occupation. This judgment was upheld by the Dutch Supreme Court in 2020, without substantiation. This interpretation raised questions about whether developers can apply the going concern regime.

Conflicting case law

On May 17, 2022, the Arnhem-Leeuwarden Court of Appeals issued two rulings challenging the earlier interpretation. The Court held that the transfer of recently leased property by a developer could still qualify as a transfer of a going concern. As new property may also benefit from a exemption from real estate transfer tax, the rulings of the Court of Appeals could result in a transaction free of VAT and transfer tax. These rulings created further uncertainty in the market.

Current Supreme Court referral

The Dutch Supreme Court has now submitted a request for a preliminary ruling to the CJEU in one of these cases. The case involves a property developer who purchased an office building and converted it into 77 residential apartments. The developer concluded lease agreements up to three months prior to entering into a sale of the property. The apartments were let, VAT exempt, for three and a half months before transferring the apartment complex with the leases to the buyer.

The Dutch Supreme Court challenges whether the transfer of the apartment complex would be VAT taxed. The VAT Directive exempts from VAT the supply of goods used exclusively for certain VAT-exempt activities, such as leasing real estate, if no right to deduct VAT was granted. This exemption does not distinguish between movable and immovable property and does not allow Member States to limit its application. The Dutch Supreme Court seems to suggest that the Netherlands has incorrectly limited this VAT exemption to movable goods.

Against this backdrop, the first question raised by the Dutch Supreme Court is whether the transfer of a going concern regime could apply if the transfer of the property would be VAT exempt because the seller used the property for VAT exempt leasing activities and thus was not entitled to deduct VAT.

The second question is, if the transfer of a going concern regime could apply, is it sufficient that the property is sold in a rented-out state, so that the buyer can operate the rented-out property? Or should the seller’s original intention in developing and renting the property, and the fact that the rental was only done to improve the saleability, also be taken into account?

Relevance to real estate practice

Until the Court of Justice of the European Union issues its ruling, uncertainty remains for market participants. In the meantime, we recommend taking the following steps:

  • Review current transaction structures to identify potential exposure and opportunities under the pending interpretation.
  • Engage with counterparties early to align on risk/benefit allocation and document agreed positions.
  • Monitor contractual terms for flexibility in case adjustments become necessary after the ruling.

The final ruling of the CJEU may have implications beyond the real estate and project development sectors, as it also raises the more general question of whether assets used exclusively for VAT-exempt economic activities can qualify as a transfer of a going concern.

Further, the interpretation by the Supreme Court of the exemption for the supply of goods that have been used exclusively for certain VAT exempt activities leaves significant uncertainty, especially about how broadly the exemption should apply to real estate transactions and what limits exist for Member States in implementing this rule.

Lastly, any changes to the scope of the transfer of a going concern regime and the VAT exemption for the supply of goods that have been used exclusively for certain VAT exempt activities may impact the eligibility of newly built property for the exemption from transfer tax.

Need assistance?

Facing uncertainty due to the pending CJEU ruling? We can help you find practical solutions tailored to your situation. Our team provides expert legal and tax advice on VAT and property transfers, ensuring the best approach despite the current ambiguity.