Supreme Court upholds the essentially new build test for renovations

The Dutch Supreme Court is sticking to its strict test for renovated buildings. In its view that reading does not conflict with the case law of the Court of Justice of the EU, and no reference is needed.

Renovated buildings in VAT

The supply of an old building is exempt from VAT and its acquisition is in principle subject to transfer tax at 10.4%. The supply of a new building, by contrast, is subject to 21% VAT and its acquisition is in principle exempt from transfer tax. The same applies to a building that has become new again through renovation.

In the 2010 day nursery judgment the Supreme Court held that renovation only counts where the work amounts to essentially new construction, but left open the criteria for assessing that. In the 2022 hotel judgment it removed that uncertainty: what is decisive is how far-reaching the changes to the structural construction are. It also held then that this strict reading is consistent with EU law.

Is a change of course needed?

The Court of Justice's 2023 judgment in Promo 54 raised the question whether the Supreme Court sets the bar too high. Some commentators read that judgment as requiring member states to treat as a renovation any work that has led to significant changes intended to alter the use of a building or substantially modify the conditions of its occupation. The consequence would be that a supply following renovation or conversion would fall within VAT far more readily.

No change of course

Following Advocate General Wattel's opinion, the Supreme Court held that its strict test is not contrary to EU law. That is, in its view, so clear that no reference to the Court of Justice is needed.

It points to the rationale for taxing supplies of renovated buildings: VAT should be charged on the added value where the works have been so far-reaching in substance that the building can be equated with a new one. The Supreme Court also notes that the VAT Directive gives member states the option of laying down the conditions for renovation. A mandatory definition would render that option a dead letter.

What this means

The standard for renovation does not change. For the property sector the good news is the clarity, so that parties are not left uncertain about the test all over again.

Not everyone will be pleased, however. On renovations of commercial property such as offices, distribution centres, hotels and shops, parties usually prefer the supply to fall within VAT, because the buyer can deduct the VAT charged. Sticking to the strict test means that preferred outcome is often unattainable.

For those renovating property that will not be used for activities carrying a right to deduct, such as housing and social infrastructure, the position is reversed. For them a supply within the transfer tax system is more favourable: 2% or 10.4% transfer tax instead of 21% non-deductible VAT. The high bar means that outcome is often achievable.