No VAT charged on the supply of leased property
Two decisions issued by the Arnhem-Leeuwarden Court of Appeal in the Netherlands on 17 May 2022 likely will be welcomed by property developers. Departing from its own jurisprudence, the court held that the supply of short-term leased property by a property developer should be regarded as the transfer of all or part of a business—in other words, the transfer of a going concern or TOGC—with the result that the transfer falls outside the scope of VAT so no VAT will be levied on the transfer.
The issue of whether the supply of leased property is subject to VAT is a common area of dispute between taxpayers and the tax authorities. Under the VAT law, the supply is not subject to VAT if it qualifies as a TOGC. To qualify, the assets transferred should constitute an enterprise under which an autonomous economic activity can be carried out and the transferee must carry on the same kind of business that was operated by the seller. The sale of assets by a VAT-registered business, however, typically is treated as a taxable supply subject to VAT at the standard rate. In the cases before the court, the Dutch tax authorities took the position that the transactions involved a supply of goods subject to VAT.
Until recently, it was presumed in Dutch practice (based on jurisprudence and upheld by the Supreme Court) that the supply of leased property by a property developer is subject to VAT if the developer does not intend to operate the property itself, but instead intends to dispose of the property (e.g., by selling it). In this situation, the property is classified as an inventory asset and is subject to VAT. However, the Arnhem-Leeuwarden court recently ruled differently in two cases.
One case involves a property developer who acquired a parcel of land in February 2017. In July 2017, the developer entered into a lease agreement for a yet-to-be-built residential (care) complex. Eleven days after construction of the complex was completed on 19 November 2018, the developer sold it to a buyer. The second case involved a developer who purchased an office building in 2015 and transformed it into residential apartments. Lease agreements were concluded between April and June 2017 and the apartments were occupied by tenants in August 2017. During the transformation process, it was clear that the complex would be sold to an investment company and this took place in November 2018 in a rented state.
The Arnhem-Leeuwarden Court of Appeal ruled in both cases that there was a transfer of an independent economic activity at the time of the transfer, which as such constitutes a business. The seller’s intention to subsequently sell the property is irrelevant. These decisions would seem to imply the court is moving in a different direction.
Impact on real estate practice
Property developers or persons that purchase leased property that has been (re)developed should establish from the outset whether a supply involves a sale of assets or a sale or transfer of a business, which may require asking the tax authorities for their opinion. If the transaction involves a TOGC, the sale will not be treated as a supply for VAT purposes, so no VAT should be charged. If a seller incorrectly assumes it is transferring a business and this subsequently proves not to be the case, the seller may be at risk of additional VAT being levied. Conversely, if a business is transferred but the seller charges VAT, the customer runs the risk of a VAT assessment being imposed, because incorrectly charged VAT cannot be deducted. Furthermore, when a business is transferred, the buyer becomes the successor of the seller with respect to all current VAT rights and obligations.
The decisions of the appeals court are likely to be appealed to the Supreme Court.