On June 10, 2011, the Dutch Supreme Court rendered three important decisions regarding the VAT and transfer tax treatment of real estate transactions. The most important decision concerns the concurrence exemption (samenloopvrijstelling) VAT/transfer tax on the acquisition of shares in a ‘real estate entity’ that owns new (unused) real estate. In the past nearly thirty years it was assumed that, based on a 1982 Supreme Court decision, this exemption was not applicable to such situations. The Supreme Court repealed this decision and decided that the acquisition of shares in a real estate entity is exempt from transfer tax if the direct acquisition of the real estate would also have been exempt under the concurrence exemption.
The other two decisions concern the VAT treatment of new or not new (unused) real estate, including building sites. In principle, VAT is owed on transfer of new (unused) real estate or a building site, and the concurrence exemption applies. Dutch legal practice was based on the assumption that a building site should meet certain objective requirements at the time of transfer. Following the so-called Don Bosco decision by the European Court of Justice (ECJ), the Supreme Court ruled that, under certain conditions and circumstances, these requirements should be interpreted differently, resulting in an easier qualification of land as a building site for VAT purposes.
General background
In principle, transfer of Dutch real estate is VAT-exempt and subject to transfer tax. An exception is made for the transfer of new (unused) real estate and for VAT building sites. Real estate qualifies as new if transfer takes place prior to, on, or within two years after the date of first use. These transfers are, by law, subject to VAT and, on specific conditions, exempt from transfer tax (the concurrence exemption).
Real estate entities
The decision regarding the concurrence exemption on the acquisition of shares in real estate entities
On September 7, 2007, taxpayer X BV acquired shares in a real estate entity. The assets of the entity consisted primarily of two plots of unused VAT building sites. In the decision of June 10, 2011, the Supreme Court ruled that the concurrence exemption for transfer tax also applies to the acquisition of shares insofar as the assets of the entity consist of new, unused real estate for VAT purposes. The Supreme Court argues that the provision according to which shares in a real estate entity are considered real estate has no other purpose than to prevent the avoidance of the levy of transfer tax by inserting a legal entity. In case the acquisition of the real estate itself would not have been subject to transfer tax, insertion of a legal entity does not result in the avoidance of transfer tax. There is, therefore, no reason to exclude such an acquisition from the exemption. The fact that no VAT is levied on the acquisition of the shares is not relevant in this respect.
Old, new or building site?
The Supreme Court also rendered decisions in two other cases regarding the concurrence exemption VAT/transfer tax on June 10, 2011. These decisions deal with the question at which moment there is a VAT-taxable transfer of property (new real estate or a building site).
Decision regarding the transfer of a partly demolished shopping mall
This decision regards the transfer of a partially demolished shopping mall. Up to the transfer date, demolition was conducted at the risk and expense of the seller. After the transfer, the shopping mall was rebuilt at the expense and on behalf of the buyer, resulting in new real estate for VAT purposes. The buyer was of the opinion that, due to the partial demolition, the shopping mall no longer qualified as old real estate but rather as new real estate ‘in progress’; the transfer of the shopping mall was therefore, by law, subject to VAT and consequently exempt from transfer tax. In this context, the Supreme Court asked the ECJ to answer, taking into account the fact that the building activities were continued and finalized by the buyer, the question whether VAT is owed on the transfer of a building where the seller carried out demolition/renovation activities before such transfer, with a view to creating a new building (vernieuwbouw).
The decision concerning the Don Bosco case
The Don Bosco case involved a similar situation. The decision involved the transfer of partially demolished buildings, regarding which the buyer had entered into a commitment to deliver a vacant lot, at his own risk and expense. On November 19, 2009, the ECJ ruled that, under certain circumstances, the parcel of land with the partially demolished buildings, together with the seller’s obligations, for VAT purposes qualifies as (essentially) vacant land. It is not relevant, for this decision, whether the buildings to be demolished are still largely standing at the moment of transfer. The intentions of both buyer and seller are also to be taken into account. Pursuant to the ECJ’s decision, the Supreme Court ruled that the question should be investigated whether this vacant land qualified as a building site for VAT purposes at the moment of transfer. The Supreme Court referred the case to the Court of Appeals in The Hague for further investigation.