VAT on converted buildings, the European Court of Justice confirms the Belgian rules, but ...
In its highly anticipated decision of 9 March 2023, the European Court of Justice has not invalidated the Belgian VAT rules on "renovation” (Case C‑239/22, État belge and Promo 54 v Promo 54 and État belge). Nevertheless, the position of the VAT administration tax authorities regarding the VAT treatment of renovated or converted old buildings remains problematic.
The sale of real property is not subject to VAT but to registration tax. However, new buildings can be sold with VAT. A building is new until 31 December of the second year after it was first occupied or used.
Converted or renovated buildings can be considered "new" and sold subject to VAT, but the Belgian VAT rules are complex and rely on several criteria that determine whether a building is new. The position by the VAT administration is that a building is new if it has undergone radical changes in its essential elements, nature, and structure, and where appropriate, its purpose. In practice, the 60% rule is often applied, a converted building is considered new if the value of the works exceeds 60% of the sale value of the building (without land) after the works.
Article 135(1)(j) of the VAT Directive provides a VAT exemption for the supply of a building. This article refers to Article 12(1)(a) of the VAT Directive, which states that the supply of a building or parts of a building and of the land on which the building stands, before its first occupation, is subject to VAT. However, this article allows Member States to lay down detailed rules to classify a converted building as a new building. Member States can introduce criteria to classify a renovated building as a new building.
The Promo 54 case
The case relates to a collaboration agreement between two companies, Immo 2020 and Promo 54, to convert an old school building into apartments and office space. Immo 2020, the owner of the land and old structures, sold the building and land to private investors without VAT. Promo 54 then entered into a building contract with the buyers to renovate the building and invoiced its services with 6% VAT.
The VAT administration viewed this type of arrangement unfavourably and consider it as "abuse" as stated in Administrative Decision No. ET 120.125 of 13 May 2014. The facts date from before this decision, but it can be assumed that the tax authorities also invoke the notion of abuse here.
Immo 2020 and Promo 54 argue that the converted building cannot be subject to VAT. They contend that an old building in use for some time cannot be considered new in Belgium since the VAT Code does not specify that a converted old building can be subject to first occupation, as stated in Article 12(2) of the VAT Directive. Therefore, strictly speaking, a converted old building can never be regarded as "new" for VAT purposes.
They further argue that Article 12(2) does not have direct effect and cannot be applied in Belgium since the provision states that “Member States may …". In other words, Member States are not required to implement this provision in their national legislation. Immo 2020 and Promo 54 consider that the application of this provision in the administrative doctrine is insufficient. In other words, only new buildings that have not been used before could fall within the scope of VAT in Belgian law.
The question referred to the Court
The Supreme Court referred the following question to the Court of Justice:
‘Must Article 12(1) and (2) and Article 135(1)(j) of Directive 2006/112 be interpreted as meaning that, where the Member State has not defined the detailed rules applying the criterion of first occupation to converted immovable property, the supply, after conversion, of a building in respect of which, before conversion, there had been first occupation within the meaning of Article 12(1)(a) or [the third subparagraph of] Article 12(2) of [Directive 2006/112] remains exempt from [VAT]?’
In other words, can converted buildings can be subject to VAT in Belgium, or is there a VAT exemption because Belgium has not laid down criteria for the "first occupation" of renovated buildings.
The Court begins by stating that old buildings are generally not subject to VAT, while new buildings are. The ratio legis of these rules is that the sale of an old building hardly generates any added value. Member States are allowed to determine the conditions for applying the criterion of "first occupation" for converted buildings under the second subparagraph of Article 12(2) of the VAT Directive, but they cannot change the concept to undermine the useful effect of the VAT exemption.
If the VAT on a building were to depend on the conditions which a Member State sets for applying the criterion of first occupation when converting buildings, Member States could undermine the fundamental principles of taxation and exemptions.
The Court finds that the building in this case has undoubtedly undergone significant changes. And in accordance with the case law of the Court, this would make it a "new" building. However, the Court leaves it to the referring court to confirm this assessment.
This is an important decision for the Belgian real estate sector, as it puts an end to the uncertainty as to whether a converted building can become “new” for VAT purposes. This question was resolved by the Court simply by stating that a conversion should result in a new building in all Member States, if the basic conditions stated by the Court in previous case-law are met.
However, the Court does not elaborate on the question under which conditions is considered to be a new building; that was not the issue in this case. In practice, there is a lot of discussion on this issue.
To qualify as a (converted) new building, the "60% rule" is also used in Belgium. Indeed, if the cost of the (material) works is 60% or more of the sales value of the building (without the land) after the works, the building is a new building. Such a rule does seem to have to been included in Belgian law based on previous Court case law.
This explains why this 60% rule is considered "optional" by the VAT administration. They cannot invoke it against the taxpayer. After all, there is a European definition of conversion leading to new construction. That fact in itself then raises questions about the position of the VAT administration on (old) buildings that are sold and then renovated. If the sale and the renovation are considered indivisible, the tax authorities assume an off-plan sale - and thus a new building.
Based on the decision of the European Court of Justice in the Promo 54 case, as in many others, this appears to be a step too far. A decision that may, at first sight, seem favourable for the tax authorities can have other unexpected consequences.