Good news for the Dutch Real Estate Market: Dutch court rules that no VAT is due on the sale of newly constructed apartments by a real estate development company due to the application of the TOGC rule

On 17 May 2022, the Dutch Court of Appeal of Arnhem-Leeuwarden issued two interesting decisions on the application of the Transfer of Going Concern (TOGC) rule to the transfer of newly constructed apartments by a real estate developer.¹ The Court of Appeal set aside the ruling of the Dutch lower courts. In this alert, we highlight the relevant elements of these decisions for the Dutch real estate market.

General background

Both of the court cases pertain to real estate that is developed / transformed into residential apartments. In both cases, the real estate developers (hereinafter collectively referred to as the Real Estate Developer) initiated the realization and lease of the apartments a few years before the sale of the leased apartments to an investor. The lease agreements include several service agreements. After the sale, the lease agreements are to be continued by the purchaser. No VAT was paid in respect of the sale.

The Dutch Tax Authorities (the DTA) and the lower courts were of the opinion that VAT was due on the sale of the leased building, considering it a supply of goods for VAT purposes. The Real Estate Developer believed that the sale of the leased building constituted the transfer of a totality of assets, which would mean that due to the TOGC rule no VAT was due on that transfer. The application of TOGC could be very beneficial. It will prevent that any irrecoverable VAT will be due upon the transfer of the apartments.

Legal framework of a transfer of the totality of assets

For Dutch VAT purposes, in the case of a transfer of all or part of a totality of assets, whether or not for consideration or in the form of a contribution into a company, no supplies of goods or services are deemed to be made, with the body to which the goods are transferred taking the place of the transferring body, unless stipulated otherwise.

In short, if the transfer of a totality of assets is not deemed to be a supply of goods or services, no VAT would be due on that transfer.

Court decision

The Court is of the opinion that the supplies of the leased apartment buildings should be considered transfers of a totality of assets. With the leased buildings, an independent economic activity can be exercised, namely the exploitation (lease) of apartments with additional service activities. For that reason, the sale of the building with tenants and ongoing rents and additional service activities cannot be regarded as the simple transfer of assets, such as the sale of a stock of products.

The Real Estate Developer actually exercised this economic activity and thus used the building and the associated contracts in its business. The Court of Appeal found it relevant that the rental agreements included various (service) obligations for the landlord (first the Real Estate Developer and then the purchaser). In view of a judgment of the Court of Justice of the European Union in the Zita Modes Sàrl² case, the Court of Appeal ignored what the DTA had said about the intentions of the Real Estate Developer at the time of the sale. Such a criterion cannot be found in the explanation of transfer of a totality of goods.

Thus, no VAT is due over the sale of the leased buildings, as the sale is not considered to be a supply of goods for VAT purposes, but rather a transfer of a totality of assets.

Impact on the real estate market and concluding remarks

In the real estate tax practice, it was generally assumed that the sale of newly constructed properties by real estate developers does not qualify as the transfer of a totality of assets, due to the intention of the developers to sell the building on short notice, and not to exploit it themselves. However, the intention does not seem to play a role in the question of whether a sale constitutes the transfer of a totality of assets. Therefore, it may now be possible for the sale of newly constructed apartments to take place without charging VAT.

We would like to point out that the DTA can still appeal these decisions in cassation, so to appeal to the Dutch Supreme Court. Meanwhile, these decisions will most likely prove to be beneficial to the real estate market.

If you have any questions about these decisions and how they may affect your business, feel free to reach out to Sebastiaan Wijsman or Sharada Dhalganjansing.