CJEU rules converted buildings treated as new for VAT purposes if value added

On 9 March 2023, the Court of Justice of the European Union (CJEU) ruled in a Belgian case (C-239/22) that converted buildings qualify as new if they create added value, and are therefore taxable for VAT purposes. This treatment follows the EU VAT directive and must be applied regardless of whether the domestic VAT legislation has further defined the concept of new.

Background

The EU VAT directive provides that the supply of buildings is generally exempt from VAT, with no right to an input VAT deduction; however, the supply of buildings prior to their first occupation (“new” buildings) is excluded from the exemption, and is therefore taxable, if carried out by a professional seller or other taxable person. The rationale behind this differentiation is that the sale of an old building creates very little added value and can therefore be exempt from VAT.

However, the concept of “first occupation”—which is key to determining whether the supply is of a new building—is not further defined in the directive. For newly erected buildings the treatment is clear and not open to further interpretation; however, for converted existing buildings, the VAT directive allows member states to set further conditions for the application of the first occupation criterion.

Belgium has introduced the conditions under which converted buildings qualify as new in administrative guidelines, but no conditions have been included in domestic law. According to the VAT Commentary, there are two situations where converted buildings are treated as a new construction for VAT purposes:

• The first is a qualitative condition, where only drastic changes to the essential elements (i.e., the structure, nature, and possibly the intended use) of the building ensure that a renovated building qualifies as a new construction for VAT purposes.
• The second condition is quantitative, and may only be invoked by the taxpayer in the case of major changes where the material construction costs are at least 60% of the sale value of the building (excluding land value) after the renovation works.

The classification of a building as old or new has considerable implications for the tax treatment, including in terms of VAT rates to be applied to the onward supply, and VAT deductibility of costs already incurred. It is therefore no surprise that in practice this issue has been the subject of discussions with the VAT authorities for many years.

Facts of the case

The taxpayer had converted a former college into apartments and offices, and treated the onward supply as the exempt supply of a building and land, followed by a supply of renovation services at a reduced rate of 6%. The Belgian tax authorities claimed that the transaction was artificially split and instead, the whole supply was of a new building, based on reference to the administrative guidelines, and therefore taxable at the standard VAT rate of 21%.

The taxpayer argued that in the absence of any relevant legal criteria, the term new does not extend to converted buildings, and that the tax authorities cannot therefore impose VAT on the sale.

The Belgian Court of Cassation could not provide a decisive resolution, and on 5 April 2022 referred the question to the CJEU as to whether the relevant articles of the EU VAT directive must be interpreted as meaning that the supply of a converted building that was occupied prior to conversion should be exempt from VAT, where a member state has not defined detailed rules regarding the criterion of first occupation.

Decision of the CJEU

In its decision, the CJEU focused on the fundamental principle of taxing added value, and ruled that even when not expressly confirmed or clarified in the domestic law of the relevant member state, when the delivery of a converted building generates added value, it meets the criterion of first occupation as provided for in the EU VAT directive. Member states must not undermine this principle in their national legislation, and must always consider the interpretation of the concept of “first occupation” provided by the CJEU. Therefore the taxpayer’s argument that the relevant principles did not apply because they were not contained in domestic law was not valid.

In a previous judgment (C-308/16), the CJEU ruled that the conversion of old buildings gives rise to a new building when the building has undergone significant alterations intended to change its use or to substantially change the conditions under which it is used.

The CJEU’s interpretation may then be further explained by member states, for example by developing a quantitative criterion for the renovation costs, to determine when such alterations may be significant.

Comments

The CJEU’s decision that converted buildings are taxable as new buildings follows the VAT directive, in as much as the conversion gives rise to added value through significant changes. The fact that Belgium has not provided further details in its national legislation cannot detract from this finding.

On the other hand, this seems to confirm once again that the administrative guidelines provided by the Belgian VAT administration may not be aligned with the concept of converted buildings as interpreted by the CJEU; as it would appear that the guidelines attach too much importance to changes in the essential elements of the structure of the buildings, where the CJEU only refers to significant changes intended to change or radically alter the use of a building. This is increasingly relevant for example where (legally required) energy renovations carried out on old buildings radically change the use of a building and create indisputable added value.

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