THE NETHERLANDS - CJEU asked whether adjustment of deductions can be spread out over time
On 14 December 2018, the Supreme Court of the Netherlands announced it has asked the Court of Justice of the European Union (CJEU) preliminary questions on whether a particular treatment under Dutch VAT rules contravenes VAT Directive 2006/112/EU.
Facts and circumstances
The taxable person, a VAT registered business, built an apartment complex on its own property. Construction started in 2013 and it was completed in July 2014. The taxpayer fully deducted the VAT they were charged for the construction because the taxpayer intended to use the whole complex for activities related to producing VAT taxable supplies. In principle, under Dutch law, the rental of immovable property is a VAT exempt service, but a taxpayer may opt to rent out the property and charge VAT on the rental. Apparently, in this case, four lessees wanted to rent the apartment without being charged VAT.
Though the taxpayer originally assumed that all the lessees would opt for renting with VAT, it turned out some of the lessees wanted to rent the apartment without VAT, and the taxpayer agreed. So, as of August 2014, the taxpayer had rented four of the seven apartments without charging VAT on the rent. The Dutch tax authorities claimed that, in accordance with the Dutch VAT rules and regulations, the taxpayer should adjust the initial VAT deductions it claimed in relation to the four apartments. And, the Dutch tax authorities said the taxpayer had to make the adjustment of the initial deduction in full back to the time the apartments first entered into use, which was August 2014.
Subsequently, the taxpayer filed an objection, taking the position that adjustment of the VAT all at once at the time the immovable property is first put into use (August 2014) is contradictory to the VAT Directive 2006/112/EU. Instead, the taxpayer was of the view that the adjustment should be spread over 10 years, which is essentially the depreciable life of the immovable property.
In dispute is whether the Dutch VAT legislation is contrary to articles 184 - 187 and article 189 of the VAT Directive with respect to the VAT correction having to be made all at once at the time the property was first used.
The relevant articles of the VAT Directive provide regulations related to the adjustment of the originally deducted input VAT. Article 187 of the VAT Directive also states that for capital goods, such as immovable property, the adjustment of the deducted VAT should be spread over multiple years.
The Dutch Supreme Court doubts whether the Dutch legislation conflicts with the Directive. So, the Dutch Supreme Court has asked the CJEU whether articles 184 - 187 and 189 of the VAT Directive conflict with the method for adjustment of VAT deductions set out in the Dutch VAT rules and regulations.
Until the CJEU issues its judgment, the practical consequences are unclear. Nevertheless, in situations where the Dutch VAT rules and regulations require an immediate adjustment of input VAT deductions, it could be appropriate to appeal payment of amounts required as a result of such an adjustment. By doing so, the taxpayer will keep its formal rights open and can possibly benefit from a cashflow advantage in the event the CJEU decides the requirement for immediate adjustment of deductions is contrary to the Directive. And, if the CJEU decides the Dutch treatment contradicts the Directive, the VAT adjustment can be spread over 10 years instead of paying the complete adjustment at the moment the real estate was taken into use for the first time.