On June 26 2020, the Dutch Supreme Court ruled that the VAT incurred on maintenance costs on a vacant property can be deducted if the property could be leased for VAT taxable (VATable) purposes. It seems that the Supreme Court has lessened the requirements for a landlord’s eligibility to deduct VAT on maintenance costs.
This is a positive outcome for the commercial real estate practice. The intention to use real property for VATable activities should no longer be proved through concrete actions in order to deduct the VAT on maintenance costs. This could potentially lighten the administrative burden of landlords.
Facts and circumstances
In this case, the party concerned was the owner of an office building that was vacant between 2008 and mid-2009. The building was suitable for mixed purposes, which means the property could be used for VATable as well as VAT exempt activities. During this vacancy period, the landlord incurred several costs in order to maintain the building in a good condition. The VAT related to these costs was deducted by the landlord through his/her regular VAT return.
After this period of vacancy, the landlord leased the property to a VAT exempt tenant (a Dutch municipality). The Dutch tax authorities imposed an additional VAT assessment, taking the view that the VAT incurred on the maintenance costs could not be related to a VATable activity.
The Dutch Court of Appeal was of the opinion that the landlord did not have the right to deduct VAT, as – based on standard case law – the landlord was not able to prove by way of objective information that he had the intention to use the property for VATable activities.
Property maintenance costs are costs required to maintain the property in a good condition and include, but are not limited to, sanitation, security, water and heating. For VAT deduction purposes, these costs are considered to be directly used. Deduction should be possible as long as the landlord has the intention to render VATable activities. With respect to a vacant property, it is not always easy to determine the future use of the property. Most properties can be leased as VATable or VAT exempt. This generally depends on whether a future tenant can opt for a VATable lease.
Based on earlier case law, the landlord needs to evidence his intention by objective information such as an instruction to a broker to market the property for a VATable lease.
Referring to EU case law (Imofloresmira (C-672/16)), the Supreme Court explained that the VAT deduction system intends to relieve the taxpayer entirely of the burden of the VAT payable or paid in the course of all his economic activities. The VAT system, therefore, ensures complete neutrality of taxation of all economic activities, whatever their purpose or results, provided that they are themselves subject to VAT.
The Supreme Court concluded that it would be contrary to the purpose of VAT deductibility if the deductibility was refused if costs were made for the maintenance of a vacant building that is suitable for a VATable lease. Based on whether a property is suitable for VATable use, such a right of deduction of VAT would exist even when the landlord is not able to provide objective information to prove this potential VATable use.
This judgment is very relevant and welcome for the Dutch real estate practice, especially in these days of increasing vacancy rates due to the unprecedented rise in people working from home due to COVID-19.
It seems that the Supreme Court has reduced the burden of proof for the deduction of VAT on maintenance costs in relation to vacant properties. As long as the property is potentially suitable for VATable use, the deduction of VAT cannot be refused by the Dutch tax authorities. As such, there is no need for the landlord to actively market the property for VATable use.
In this case, the property was considered a school building also suitable for use as an office building. Office space is generally always suitable for VATable use (i.e. VATable lease). It will be interesting to see what the implications of this case will be for other types of properties, such as residential properties or care-sector properties.
In our view, as long as there is even a possibility that a property could be leased to a VATable tenant, the deductibility of VAT on maintenance costs should, without further evidence be accepted.
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