It is contrary to EU VAT rules to regard the transfer of a plot with a building as a taxable ‘supply of a building plot’ simply because the intention is to demolish the building. The Ministry of Taxation’s practice has been overturned by the EU Court of Justice.
Read attorney Hans Sønderby Christensen’s article published on Monday, September 25, 2019, on Jyllands-Posten’s website here or download it as a PDF here.
In the spring of 2013, KPC Herning (hereinafter KPC), a Danish project development and contracting company, together with Boligforeningen Kristiansdal, decided to develop a project for the construction of youth housing on Odense Harbour. For this purpose, in the autumn of 2013, KPC acquired ‘Finlandkaj 12’ with the existing warehouse on the property. The purchase was conditional, among other things, on KPC entering into an agreement with a public housing association for the construction of a youth housing project on the site.
At the end of 2013, KPC resold the plot with the existing warehouse to Boligforeningen Kristiansdal. The sale was conditional, among other things, on KPC being responsible for the planning and conversion of the property into youth housing, which was to be delivered in a complete and finished condition. The housing association was to be responsible for the demolition of the existing warehouse, with the exception of part of the gable, which was to be preserved.
In connection with these sales transactions, KPC requested a binding ruling from the Tax Council on whether the purchase and resale of the property were VAT-free. In its binding ruling in the summer of 2014, the Tax Council ruled that, according to established practice, VAT should be paid on the sale of a built-up plot where the buildings are subsequently to be demolished. KPC brought the binding ruling before the National Tax Tribunal, which made a decision at the end of 2015. The National Tax Tribunal changed the decision. It found no basis for characterising the transactions as ‘supply of a building plot’ subject to VAT. It emphasised that a building had been erected on the property both at the time of purchase and resale. Furthermore, the subsequent demolition of the warehouse took place without the participation of KPC.
In the spring of 2016, the Ministry of Taxation brought the National Tax Tribunal’s decision before the Court in Herning. Due to the fundamental nature of the case, it was referred to the High Court of Western Denmark, where it is now pending. The High Court of Western Denmark has requested further information on the correct interpretation of certain provisions of the EU VAT rules. Including, among other things, with regard to the understanding of ‘supply of a building plot’. On this basis, it decided to postpone the case and refer a preliminary question to the EU Court of Justice. The question to the EU Court of Justice was whether it is compatible with EU VAT rules to regard the supply of a property on which a building has been erected as a taxable ‘supply of a building plot’ when it is the parties’ intention that the building should be demolished.
The Ministry of Taxation was of the opinion that both the transaction in connection with the sale to KPC and the transaction regarding the resale to the housing association should be qualified as ‘supply of a building plot’. KPC believed that the transactions relating to the property should be qualified as ‘supply of an old building’. The Commission, which submitted a statement in the case, took a middle ground and considered that the sale to KPC concerned ‘supply of an old building’, while the resale to the housing association should be qualified as ‘supply of a building with associated land’, since it involved the construction of a new building. This raised a question as to whether the transactions should be regarded as several separate transactions or as one single transaction consisting of several related services. This qualification is of significant importance for the assessment for VAT purposes.
The EU Court of Justice established that a number of services which are formally separate and can therefore be supplied individually, and thus also form the basis for separate taxation or exemption, may nevertheless be regarded as constituting a single transaction under certain circumstances. This will be the case where two or more services supplied or performed by a taxable person are so closely linked that they objectively constitute a single economic transaction which it would be artificial to split. In order to determine whether two or more supplied services are independent transactions or constitute a single transaction, it is therefore necessary to examine what specifically characterises them.
In this connection, the EU Court of Justice referred to its own established case law, which states that the relevant objective elements to be taken into account for the purposes of the qualification may include the extent to which the demolition or conversion work carried out by the seller has progressed at the time of supply. In addition, it may also be the use of the property at the time of supply. Or it may be the seller’s obligations to carry out demolition of an existing building, which enables new construction.
As regards the first sale transaction, where KPC acquired the property, the EU Court of Justice began by stating that it was undisputed between the parties in the present case that the warehouse building had been used before the sale to KPC and that it was fully functional at the time of supply. Furthermore, none of the parties to the transaction had undertaken the demolition task relating to the warehouse. With regard to the second transaction concerning the resale to the housing association, it was likewise undisputed between the parties that the warehouse was fully functional at the time of supply. Furthermore, the demolition only took place after the resale, and KPC was in no way involved in the partial demolition. On the other hand, it was the housing association that transferred the demolition to a third party for its own account and risk. Thus, the demolition appears to be a transaction that was independent of the resale.
On this basis, the EU Court of Justice found that the two transactions could not be regarded as part of one and the same transaction and should therefore be considered separately for VAT purposes, i.e. that it should be assessed separately for the transactions whether they could be qualified as a taxable ‘supply of a building plot’.
With regard to this assessment, the EU Court of Justice referred to the fact that, in determining the ‘supply of a building plot’, Member States are obliged to observe the purpose of the EU VAT rules, which is solely to exempt from VAT supplies of undeveloped land which are not intended to serve for the construction of a new building. Furthermore, that Member States’ margin of discretion is limited by the scope of the concept of ‘building’, which the EU legislator has defined broadly. In addition, a distinction is made between whether a building is old or new. The sale of an old building is not subject to VAT. The underlying consideration behind the distinction is that the sale of an old building, i.e. sale after the first supply, does not add value and should therefore not be subject to VAT (value added tax). In the situation in question, none of the transactions increased the value of the property ‘Finlandkaj 12’.
On the basis of this, the EU Court of Justice concluded in summary that it is contrary to EU law to regard the transfer of a plot with an existing building as a taxable ‘supply of a building plot’, even if the intention is that the building should be demolished. The sale to KPC and the resale to the housing association could therefore not be qualified as ‘supply of a building plot’, which is subject to VAT.
