Transfer of leased building by developer constitutes a transfer of a going concern (TOGC) for Dutch VAT purposes

Dutch Court of Appeal recently ruled that the transfer of buildings which were only leased for a short period of time (2 weeks and 3,5 months) qualifies as a TOGC and is therefore not subject to VAT.

Based on existing case law, the sale of a new building leased out for a short period of time does not qualify as a TOGC for VAT purposes. The reason for this is that the main activity of the seller (i.e. the developer) is the development of a building. In contrast, the business activity of the purchaser is the long-term lease of immovable property. Considering that the transferee of the building does not continue the business activity of the transferor (i.e. project development), the transfer does not qualify as the TOGC.

This long-standing practice was recently questioned by a judgement from the Dutch Court of Appeal. In this case, a project developer developed a new building and sold this to an investor shortly after the completion of the property. These buildings were only leased out for 2 weeks and 3,5 months at the time of the transfer. The court ruled that the leasing of the property by the developer constitutes an independent economic activity for VAT purposes. Considering that the purchaser continues the leasing business of the developer, the transfer of the property qualifies as a TOGC. The fact that the property was only leased out for a brief period of time (before being transferred to the purchaser) did not change this analysis.

This judgement is good news for investors as it avoids the needs for pre-financing the VAT and it may result in a VAT benefit where a seller transfers a building that is used for VAT exempt activities (no VAT on the profit margin of the seller).

Key takeaway

The judgement from the Court of Appeal is beneficial for investors. However, as this position has not yet been confirmed by the Dutch Supreme Court it remains unclear whether the transfer of a building (leased out for a short-term) qualifies as the transfer of going concern for Dutch VAT purposes. However, qualification of the transaction as a TOGC, where the lettings are genuinely made to third parties, and not purely to support TOGC treatment, would be consistent with the established UK position which is based on EU case law.