On November 19, 2009, the European Court of Justice (“ECJ”) rendered an important decision for the real estate sector. According to the ECJ, a plot of land (“lot”) with buildings on it qualifies as “vacant” if the lot’s vendor is to demolish the buildings or have the buildings demolished, and if the demolition of the buildings on the lot has already started at the moment the lot is transferred. Current Dutch policy and case law state that such lots are not vacant, so the transfer is exempt from VAT and the acquisition is liable to real estate transfer tax. This ECJ decision means that it is now easier to designate a lot as a “construction site.” In turn, this means that such transfer is liable to VAT and such acquisition is exempt from real estate transfer tax.
The case
Don Bosco Onroerend Goed bv (“Don Bosco”) bought a lot, on which stood two former school buildings. A condition of the sale was that the vendor would demolish the buildings and would include the demolition costs in the purchase price. The vendor began demolition on the day of the transfer. At the moment of transfer, part of the paving between the two buildings was removed, part of a side wall of one of the buildings on the lot was pushed in, and brickwork, windows, and window and door frames were removed or damaged. The demolition had, therefore, already begun, but was nowhere near complete.
The judgment
Don Bosco took the view that the transfer was, by law, liable to VAT, either because the owner was transferring new real estate that was not yet in use, or because this was a construction site for VAT purposes. The Dutch Supreme Court then submitted this matter to the ECJ. The ECJ decided that the vendor was not only transferring real estate but also was providing a demolition service to Don Bosco. The transfer and the demolition must not be assessed as separate but as one transaction, because the vendor and purchaser intended the transfer of a lot that was ready for construction. This means that, for VAT purposes, the transfer is of a vacant lot. The fact that the buildings to be demolished were still largely standing at the moment of transfer is irrelevant. For VAT purposes, such a vacant lot can be designated as a construction site. The ECJ left the decision as to whether this was the case to the national court. The Dutch Supreme Court still has to rule on this matter. In referring to an earlier decision, the ECJ did indicate that the VAT exemption only applies to the transfer of vacant lots not intended for construction. This raises the question as to whether the extra conditions imposed under Dutch law for the VAT-liable transfer of a construction site, such as the services available in the vicinity, or whether a building permit has been issued, are consistent with the European VAT Directive. The Dutch Supreme Court must render its decision on this matter.
Dutch policy
Current policy is that a plot of land is not vacant if a partially demolished building stands on it, and that the transfer is therefore exempt from VAT. The Don Bosco decision means that the physical state of the real estate will not determine whether or not the transfer qualifies for VAT in every case. The deciding factor could be the state of the real estate that the vendor intends to achieve. This is the case if the vendor’s demolition of the buildings is closely associated with the transfer of the real estate. The end result as transferred by the vendor is the determining factor.