Will the tax consequences of purchase and building contracts change?
In a recent ECJ decision, a parcel of land, with or without buildings, will qualify much sooner as a “building site” than before. Because of this, VAT will be imposed more often on the supply of the building site without being subject to real estate transfer tax. If this decision can be extended to purchase and building contracts, it may result in undesirable legal uncertainty.
Transfer of ownership – or acquisition – of real estate is, in principle, subject to real estate transfer tax based on the Legal Transactions Act of 1972. At present, this taxation amounts to 6%. As for VAT, the main rule that applies here is that the supply of real estate is exempt from tax. The input VAT is not deductible in this case. However, several exceptions apply to this rule. VAT is always due on newly developed property, and building sites never receive VAT exemptions. Thus, these services are both subject to VAT. In both cases, an exemption from real estate transfer tax almost always applies, so there will be no accumulation of taxation.
In November 2009, the ECJ replied to the Dutch Supreme Court’s preliminary questions on the explanation of the Sixth VAT Directive. These questions were with regard to whether the concept of a building site applies when a buyer supplies a parcel of land with a partially demolished building. The buyer adopted a two-pronged approach. First, he stated that the demolition work had led to new real estate that was not yet used as such, and, alternatively, he stated that it concerned a building site. Intended purpose: subject to VAT, exempt from real estate transfer tax.
The ECJ held a remarkable view, one that is contrary to standard practice in the Netherlands. The demolished building is not the main element of the supply, but the building site. The existing building is entirely subordinate to the supply. According to the ECJ, it is not relevant what stage the demolition of the building is in at the time of the actual supply of the site. The supply and the demolition work are regarded as one service, because the buyer and the seller intend to supply the site before it is ready for any development. With regard to VAT, the supply of the building site should be regarded as an undeveloped site. The ECJ has left it to the Supreme Court to decide whether the undeveloped site qualifies as a building site.
The ECJ’s decision could possibly result in the future amendment of Dutch law. It seems that the Netherlands sets more conditions than the European Directive allows.
Victory is often bittersweet. The opposite situation occurs in a situation with a purchase and building contract. This means that a private individual can buy existing real estate, or undeveloped land on which no new development has been built yet, which will ultimately become a residence according to an already laid down/specified construction drawing. In practice, many project developers start construction as soon as subscription to a certain percentage of the residences to be built is secured. The private buyer then enters into a building contract for the construction of the building. Through this legal concept, over 10% can be saved in taxes on the value of the land, in respect of a scenario in which a newly developed residence with land is sold. With regard to the purchase of the “existing, old” real estate, the buyer is taxed 6% real estate transfer tax and 19% VAT for the construction periods, whereas a newly developed residence with land will costs him 19% VAT on the entire purchase amount, including the land.
Already, one inspector has extended the ECJ’s decision to the scenario of the purchase and building contract. He holds that, with regard to the real estate transfer tax, an exemption is applicable to the land due to the fact that the supply is subject to VAT. The land too is subject to VAT according to the inspector, which leaves no room for the intended tax saving.
The Dutch Revenue has consented to the use of purchase and building contracts, in practice, for many years now. If the tax authorities allow for this new trend, legal uncertainty will prevail in current projects for which the tax authorities have yet to make concrete and binding promises. This is unfavorable, as companies and private individuals can run into problems if any tax or financial consequences of transactions already made, suddenly turn out differently than intended. A standstill of the residential market could be one of these consequences. It is important for the private individual that the price of newly developed real estate will not skyrocket in a time of economic crisis and an imminent abolition of the interest deduction for home acquisition debt.
Contact: Leo van Loo, Bas Neuvel