Indirect Tax News - October 2020

Exempt hiring or a different taxable supply: An important distinction

Recently, the Dutch Court of Appeal ruled in a case concerning the renting out of a plot of land and a market stall at a flea market. The question was whether these rentals were subject to VAT. Even though the court of appeal ruled in this specific case, the question of whether there is more than a bare rental is often raised in practice. It is therefore important to take note of the judgement and its possible consequences in your individual situation.

Exempt rental versus a taxable supply

The rental of immovable property is, in principle, exempt from VAT. The term immovable property refers not only to a building but also, for example, to land. A VAT exemption applies if the owner of immovable property grants a tenant the right to use (all or part of) an immovable property for an agreed period of time as if the tenant were the owner. Such a situation is also referred to as a bare rental and it has a passive character for purposes of VAT. If services are provided in addition to the bare rental, this passive character may be lost and the exemption does not apply. Examples of additional services may be cleaning, security, and catering. If the additional services are only incidental, they do not affect the passive character of the bare rental. We speak of services as being additional services if they are not an objective in themselves for the average consumer, but a mean of making the main service more attractive. If, on the other hand, the additional services are of interest to the average consumer because, for example, they enable a specific use to be made of the property, then they are no longer additional and the passive nature of the bare rental is lost. The average consumer will then no longer regard the bare letting of the property as the main service, which means that it is a service subject to VAT.

The judgment of the Dutch Court of Appeal

The case before the Dutch Court of Appeal concerned an organiser of flea markets. The organiser rented out plots of land with or without market stalls on the plot. The organiser took care of the marketing, the entrance of visitors to the flea market, and the supervision and cleaning. In dispute was whether what the organizer provided qualifies for the VAT exemption for rental of property or whether what the organizer provided should be regarded as the facilitation of, and participation in, a flea market. In the latter case, it would be a service different from rental of a property and it would be subject to VAT.

The Dutch Court of Appeal held that in this case there was a single supply in which the letting of the market stall is an ancillary service because no market stalls are let without a plot of land. The rental of the market stall would not be a purpose in itself for the average consumer, but a means of making the main service (the rental of the land) more attractive. Next, the Dutch Court of Appeal held that the exemption applies to the rental of land with or without a market stall. According to the Dutch Court of Appeal, that rental is passive and is not affected by the additional services provided by the organiser.

The significance for businesses

In practice, the question of whether a rental is a bare exempt rental or a different taxable service often arises. Think, for example, of renting out multifunctional spaces. In principle, this is an exempt rental. However, if you provide additional services, such as cleaning, catering, security or safety deposit boxes, sound installations, and the like, it may be the case that the total service is subject to VAT. However, the Dutch State Secretary has stated that this is not the case. It is, therefore, important to assess properly whether the letting is exempt from VAT or not. This is a factual matter. It is important to realise that if the rental is subject to VAT, the VAT on investments and costs incurred can be deducted. In the case of an exempt supply, though no VAT is due, the VAT on costs and investments cannot be deducted either.

Madeleine Merkx

Anne Janssen