Is "essentially new construction" for VAT purposes now clear?

Transformation of buildings - for example, from factory or office to retail or residential - is the order of the day. This often involves the question of whether or not such a transformation leads to VAT liability and the interests involved can run into tons or even millions. The Supreme Court recently issued some interesting rulings on this issue. In short, our highest court ruled that VAT only comes into play if the architectural construction has been thoroughly addressed. One of those proceedings concerned the well-known AaBe factory, once an icon of Tilburg's textile industry and now a shopping center with monumental appeal.

When redeveloping real estate in which existing buildings are not completely demolished but are given a new use as a result of the conversion work carried out, the question arises as to whether the result of that conversion has resulted in newly manufactured buildings (in a VAT sense). The financial importance of this is significant.
  • The delivery of newly manufactured buildings is taxed at 21% sales tax; for transfer tax, the acquisition is exempt due to concurrence. This is advantageous if the buyer can deduct the VAT (as most entrepreneurs can), because one then saves the transfer tax while all input tax on the conversion can be offset. For residential properties, this is actually disadvantageous because the VAT on them cannot be offset.
  • The delivery of old buildings is exempt from sales tax, the acquisition is subject to transfer tax. The rate is then 0 or 2% if it is a (completed) property in which the buyer himself will live. In all other cases, the transfer tax rate is 8%, and from 2023, 10.4%. This is therefore advantageous when it comes to homes but disadvantageous in the case of commercial buildings; transfer tax, unlike VAT, is in fact not creditable.

In practice, to determine whether a building had been substantially remodeled, changes to a building were assessed against three criteria:

  • Building identity or outward recognition;
  • Function in terms of employability;
  • Size of the investments made and the added value realized by the conversion.

These three criteria were used in case law for quite some time until, in 2010, the Supreme Court issued a ruling that the scope of the remodeling work must be such that it created "essentially new construction. That ruling caused uproar and the implementing practice pushed for greater clarity. For a long time, it remained unclear whether the three aforementioned criteria remained unchanged or whether the Supreme Court had formulated a new criterion.

In February 2022, preliminary questions were submitted to the Supreme Court by the District Court of Zeeland - West Brabant in Breda. That case focused on the conversion of a hotel building. Meanwhile, an appeal in cassation had also been lodged against the ruling of the Den Bosch Court of Appeal in the conversion of part of the former AaBe complex in Tilburg.

The AaBe case focused solely on the conversion of the monumental former factory street within the AaBe complex into the current shopping street.

Before the renovation

After the renovation

On Nov. 11, 2022, the Supreme Court's ruling in the AaBe case was published.

What does the Supreme Court say? The Supreme Court uses only one criterion: what has happened to the existing building from an architectural point of view? Only changes to the building structure, including replacement (of part) of the existing building structure, can justify the conclusion that a conversion has been so substantial that it has essentially created a new building.

Is this clear? No, certainly not; on a case-by-case basis, depending on the specific circumstances, an assessment will have to be made of the structural interventions carried out and the extent to which changes have taken place within this structure. The previous three criteria are not, either in themselves or taken together, decisive and/or necessary. They can only be considered as indications.

What to do.

  • When redeveloping maintainable buildings, you can still make an initial assessment based on known conditions.
  • If you find that significant changes have been made to the architectural identity or external recognizability of the building (appearance) and/or the function of the building, the costs of the renovation should be considered. If these are significant in absolute and relative terms compared to the value of the buildings before and after the renovation, a second assessment should be made.
  • Were any changes made to the building structure during the renovation? If so, then my suggestion is that a structural engineer then indicate what the significance of that is for the building's supporting structure. What are the costs associated with those changes?
  • If the cost of those structural alterations is significant, that is an important clue to the conclusion that the remodeling work performed may have resulted in a new property.

This article was written by Paul Cramer for De Beer Accountants & Tax Advisors.(