In the underlying case, a pharmacist and five general practitioners (“GPs") each leased a part of a building. The building was leased as a shell, and to make the building suitable for the daily practice of the pharmacist and the GPs, the building was remodelled and furnished. The pharmacist entered into agreement with the constructor and subsequently paid all the costs incurred with the reconstruction, without recharging the costs related to the leased real property of the GPs, to the GPs. Furthermore, all of the input VAT on the reconstructions costs was deducted by the pharmacist. 

In the case at hand, the matter of dispute was whether or not the pharmacist had the right to deduct all the input VAT it had been charged with by the constructor. The tax authorities were of the opinion that to the extent the reconstruction is related to the leased real property of the GPs, who provide VAT-exempt services and are therefore not eligible to deduct input VAT, the pharmacist had no right to deduct the input VAT. Consequently, the tax authorities assessed the related VAT.

The Lower Court agreed with the tax inspector and ruled that the GPs are the recipient of the reconstruction services. In this regard, the lower court was of the opinion that (1) the fact that the GPs had the benefit of the reconstruction services (to the extent it related to the leased real property of the GPs) and (2) the fact that the GPs were consulted during the reconstruction of their part of the leased real property, the GPs were to be regarded as the recipients of that part of the reconstruction service. As a result, the pharmacist did not have the right to deduct the input VAT which was related to the leased real properties of the GPs.

The lower court, however, added that in the event the pharmacist should be regarded as the recipient of the services, the fact that there was no recharge of the costs to the GPs and that the pharmacist thus paid for the costs of the GPs, as such qualifies as a "gift". Based on the Dutch Decree on Restrictions of the Right to Deduct Input VAT ("BUA"), which is based on the standstill provision of article 176 of the EU VAT Directive, the pharmacist also does not have the right to deduct the input VAT related to the reconstruction of the real properties leased by the GPs.

With regard to the first point, who should be regarded as the recipient of the reconstruction services, the Dutch Supreme Court ruled that the underlying legal relationship (i.e., the agreement) should be followed. In the case at hand, it was clear that the pharmacist entered into the agreement(s) with the constructor and should thus be regarded as the recipient of the reconstruction services. The Dutch Supreme Court stipulated that it is not of importance whether the GPs have an interest in or benefit from the reconstruction or that the reconstruction was executed in consultation with and to the wishes of the GPs.

With regard to the "gifts" and the restriction of the right to deduct input VAT based on the BUA, the Supreme Court pointed out that in the case at hand, it was clear that the pharmacist paid for the reconstruction costs in order to be able to benefit from the patients of the GPs in the long run. As a result, paying for the costs as such cannot qualify as a gift and therefore the pharmacist should in principle have the right to fully deduct the input VAT on the reconstruction costs.

Although this is not the first time the Dutch Supreme Court ruled on a case as the case at hand, it does show that "free supplies" trigger debate with the tax authorities. On the other hand, it also shows that despite the fact that no remuneration or recharge is in place, this should not automatically lead to a restriction of the right to deduct input VAT.