The Dutch Supreme Court (Hoge Raad) on 15 May 2020 affirmed a decision of the Arnhem-Leeuwarden Court of Appeals that, in April 2018, found that the transfer of a (short-term) leased office building by a project developer did not qualify as the transfer of a “going concern” for value added tax (VAT) purposes.
As a result of this judgment, parties will be confronted with a higher amount of non-recoverable VAT.
The taxpayer (a project developer) had developed business premises and office buildings for its own account and risk. After the project developer developed a building and had leased most of it, it was sold.
In the present case, the project developer had developed a building. In 2007, it found a tenant that as of the beginning of October 2010, leased the building on a VAT-exempt basis. In September 2010 (prior to the building being occupied) the project developer sold the building to an investor. The building was transferred on 15 October 2010. The investor continued the leasing of the building. At issue was whether the transfer of the leased office building qualified for VAT purposes as a transfer of a going concern.
Although the transfer of a leased building may qualify as the transfer of a going concern, the lower appellate court inferred from the case documents that the building was not used to carry on the business of the property developer. Rather, the transfer was the sale of a “good” from the inventory of buildings developed by the property developer. The property developer did not want to permanently operate the building itself and from the beginning of the development had intended to sell the building to an investor. The sale took place before the first occupation of the building. An office building was, after all, worth more in a leased state than if it is (partly) vacant, the court found. Thus, the appeals court held that the transfer did not qualify as a transfer of a going concern.
The Supreme Court upheld the decision by the appeals court.
Because the transfer does not qualify as a transfer of a going concern, VAT is payable on the full purchase price of the building. If the transfer would have qualified as a transfer of a going concern, then no VAT would have been due on the purchase price and consequently the non-recoverable VAT (in connection with the VAT-exempt leasing) would have been limited to the VAT due on the development costs of the project developer. In that situation, for example, (non-recoverable) VAT would not have been due on the development profit.
In this situation, there was a sale before the first occupation and a transfer shortly after the first occupation (two weeks). It is questionable whether the proceedings would have led to the same outcome if the building had been listed for sale several months after the first occupation. Although it appears this would not necessarily have to be the case, based on this judgment, the transfer of a leased building by a project developer probably would be less likely to qualify as a transfer of a going concern.
Bottom line—when a new building is sold, the taxpayer will always want to determine whether the transfer is to qualify as a transfer of a going concern.
Read a May 2020 report prepared by the KPMG member firm in the Netherlands
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