More clarity on VAT and transfer tax for property conversions?

The essentially new build test causes a great deal of uncertainty. The Advocate General wants it left as an open norm, but the District Court of Zeeland-West-Brabant has asked the Supreme Court for clarity.

Where a conversion produces a new building or a new part of one, 21% VAT is due on the sale and supply and the acquisition is in principle exempt from transfer tax. Where no new building arises, no VAT is due on the supply and the acquisition is in principle subject to transfer tax at 2% for a home the acquirer occupies as their long-term main residence, or at 8%. In some cases the first-time buyer exemption can be claimed.

Whether a conversion produces a new building depends, according to the case law, on whether there is essentially new construction.

A good deal of uncertainty

In practice that essentially new build test causes considerable uncertainty. It is unclear above all which sub-criteria determine whether it is met. Is what has happened structurally decisive, or is this an open norm in which weight also attaches to external changes, to changes in how the building can be used and to the cost of the conversion?

Commentators disagree and the lower courts rule inconsistently. The Dutch Tax Administration is also reluctant to take a position in advance, leaving developers without the clarity they want about the tax consequences of a conversion.

Two developments

In the Wollenstoffenfabriek case pending before the Supreme Court, the Advocate General recently advised that the test cannot and need not be given more concrete content and should remain an open norm. For practitioners that is a disappointing opinion.

The good news is that the District Court of Zeeland-West-Brabant has referred questions to the Supreme Court about how the test applies, and in particular about the weight of the sub-criteria: changes to the structural construction, external changes, change of function and the level of costs. It would be welcome if the Supreme Court provided more clarity on this.