On May 13, 2011, the Supreme Court submitted questions to the European Court of Justice ("ECJ") for a preliminary ruling on the scope of the VAT self-supply rules. The Supreme Court has asked the ECJ to rule whether or not there is a self-supply for VAT purposes in cases where property is built on ‘own’ land by a third party, where that land was previously used for VAT-exempt activities.
As a result of the self-supply charge, investments, such as development projects, are often more expensive for housing associations, care facilities and financial institutions. This is due to the additional VAT that needs to be paid, at the time of bringing into use, on costs on which VAT was not paid at the time of purchase, such as salary costs and the cost of purchasing land. The Supreme Court has requested the ECJ to rule whether the broad definition applied by the Dutch Revenue with regard to the self-supply rules is indeed consistent with European VAT rules. It is possible that the ECJ will rule that the scope of the Dutch rules is too broad.
Background and comment
A self-supply arises when self-produced goods, such as immovable property, are intended to be used for VAT-exempt activities. The self-supply charge applies to the production costs and therefore also to the land value. The question is whether a building constructed on ‘own’ land by a third party is also considered as ‘self-produced’.
The case is as follows. The operator of a sports complex had a third party replace a natural grass pitch with artificial grass. An artificial grass pitch is regarded as real estate for VAT purposes and therefore as new real estate on completion. The natural grass pitch had been owned by the operator for some time, who rented out the pitch on a VAT-exempt basis. The artificial grass pitch was similarly rented out on a VAT-exempt basis.
The operator of the sports complex took the position that the laying of the artificial grass followed by the VAT-exempt rental should not result in a self-supply charge since the Dutch legislation gives too broad a scope to the self-supply charge and is therefore in contravention of the European VAT-rules. The Court of Appeals in the Hague ruled in the taxpayer's favor. However, the Advocate-General concluded that the Dutch legislation is not in contravention of European law. Now it is up to the ECJ to provide its ruling.
Should this case be ruled in favor of the sports complex operator, it would lead to there no longer being a self-supply charge in certain cases. The VAT burden would then be limited to the non-deductible VAT on the construction costs incurred towards third parties. Costs that are not subject to VAT, such as own salary costs and VAT-exempt land would not be caught. Due to the Supreme Court's phrasing of the question, the consequence of the ruling would, at presents, seem to be limited to cases whereby the land was previously used for VAT-exempt purposes.
It is difficult to predict what the ECJ's ruling will be. It could range from completely upholding the Dutch rules to significantly limiting their scope, or anything in between. The finalization of the ECJ's ruling could take up to two years.