Two new decisions from the National Tax Tribunal on VAT on the sale of real estate emphasise that the buyer’s intention to fully or partially demolish an existing building cannot lead to the sale of the real estate being regarded as the sale of a building plot. If there is an old building on the property, the National Tax Tribunal is of the opinion that this is a VAT-free sale of immovable property.
Sale of underground car park qualifies as VAT-exempt real estate SKM2022.118.LSR
In a decision of 28 January 2022, the National Tax Tribunal concluded that the sale of a developed real estate was exempt from VAT.
The facts of the case were that a municipality in 2017 wanted to sell a property with associated parking areas to a housing company. Prior to that, the municipality would itself demolish the buildings used for commercial and residential purposes. In addition, part of the parking area would be demolished, so that only part of the underground car park would remain after the sale, with parking space for 30 cars.
In a binding decision in December 2017, the Tax Board ruled that the property was actually intended to be built on at the time of delivery. Consequently, the sale of the property was to be regarded as a sale of a building plot subject to VAT. The Tax Board emphasised that the existing underground car park could only to a very limited extent be used in connection with the new construction After an overall assessment, the Tax Board was of the opinion that the property at the time of delivery was actually intended to be built on, after which it should be considered a sale of a building plot, which was subject to VAT.
The National Tax Tribunal came to the opposite conclusion: that the transfer was a VAT-exempt supply of immovable property.
It follows from the grounds of the National Tax Court that the decisive factor for the qualification of the intended transaction – as a transfer of either a developed real estate property or a building plot – is whether, at the time of the transfer, it can be objectively established that the real estate property in question has fixed structures, in which case the real estate property is developed for VAT purposes, after which the transaction is exempt from VAT.
As the car park was to form part of the purchaser’s future construction on the site, the National Tax Tribunal found that the economic purpose of the agreement between the municipality and the purchaser was the supply of a developed immovable property which was exempt from VAT.
Sale of old demolished buildings exempt from VAT SKM2022.113.LSR
In a decision of 3 February 2022, the National Tax Tribunal has reiterated its practice that the transfer of real estate with buildings is not to be regarded as the transfer of a building plot for VAT purposes.
The facts of the case were that a partnership wanted to transfer a property on which there was an old farmhouse, a stable building and a barn. The property had been used for residential and commercial purposes for approximately 50 years. After the owner’s death, the property was inherited by his three sons, who established the partnership into which the property was contributed.
In the period 2010 to 2017, the partnership carried out agricultural activities on the property, with a machinery hire company carrying out the work. The partnership accounted for both sales and purchase VAT on this.
From 1 January 2017, the partnership leased out the agricultural land.
The partnership had requested a binding answer on whether or not a transfer of the property should be considered a transfer of a building plot subject to VAT. The Tax Agency was of the opinion that the transfer of the real estate should be regarded as a sale of a building plot subject to VAT. Among other things, it was emphasised that the purpose of the transfer of the property was to produce a building plot on which a building could be constructed. It was irrelevant that the partnership was not involved in any demolition of the demolished buildings, just as it was also irrelevant that the partnership was not to participate in further development of the property.
The National Tax Tribunal came to a different conclusion than the Tax Agency and in its decision emphasised that the property had been used for residential purposes for many years and that the buildings existed at the time of acquisition.
The fact that the buildings were not used in the period after 2010 and that the partnership had described the buildings as “old buildings ready for demolition”, where the purchase agreement did not specify a value of the buildings, could not lead to a different result.
Our judgement
With the above two decisions from the National Tax Tribunal, it is very thought-provoking to see that the Danish Tax Agency continues to try to have a very broad interpretation of what is to be considered building land for VAT purposes. This applies partly in relation to real estate with buildings that are in the autumn of their lives, and partly in relation to real estate with buildings that are in the spring of their lives. As regards the latter, Bachmann/Partners Advokatpartnerselskab is representing a client in a pending court case in which the Ministry of Taxation is of the opinion that a foundation constructed before 1 January 2011 does not mean that it is real property with existing buildings, but rather a building plot.
On the basis of the judgment of the Court of Justice of the European Union in the KPC case, the National Tax Tribunal is of the opinion that the concept of “building” is defined in the VAT Directive as any fixed structure, including that the concept of “building” is a concept under EU law that must be interpreted broadly. In its decisions, the National Tax Tribunal has rejected the Danish Tax Agency’s view that buildings must be functional at the time of acquisition as a condition for VAT exemption.
Bachmann/Partners Law Firm has extensive experience with VAT in connection with real estate and assists with VAT assessments of property projects where there may be doubts about the VAT treatment. It is essential when transferring real estate consisting of built-up areas with old and demolished buildings that a review is carried out before a transfer takes place. Bachmann/Partners Law Firm assists in assessing how the further course of a property transfer should be handled in terms of VAT.
For further information, please contact Diana Mønniche on tel. 20717862 / dme@bachmann-partners.dk, Christian Bachmann on tel. 30 30 45 21 / chb@bachmann-partners.dk or Peter Hansen on tel. 40 32 35 35 35 / pha@bachmannpartners.dk.