On 10 January 2014, the Dutch Supreme Court ruled that, in determining the ratio of the right to deduct input VAT with regard to goods or services that are used for VAT-exempt as well as for VATable activities, the amount of deductible input VAT should not be determined based partially on the actual use of the goods or services (based on objective and accurate data) and partially as well on thepro rata use of the taxable person. According to the Supreme Court, the Dutch VAT Act only allows the taxable person to use one approach; either pro rata or actual use.

Article 173 Paragraph 2, Sub c of the EU VAT Directive provides the possibility for EU member states to determine the right to deduct input VAT based on the actual use of the goods or services. This possibility has been implemented in the Dutch VAT Act. However, the Dutch VAT Act only allows this approach, instead of using the pro rata one, in the event that the taxable person or tax authorities who claim a right to deduct input VAT based on actual use can prove that the actual use approach provides a better reflection of the right to deduct input VAT. In this regard, the European Court of Justice has stated on several occasions that the deduction system established by the EU VAT Directive is meant to relieve the taxable person entirely of the burden of the VAT payable or paid in the course of all his economic activities. Thus, the common system of VAT seeks to ensure complete neutrality of taxation of all economic activities.

In the case at hand, a VATable person who performs both VATable as well as VAT-exempt activities has built a new office building.  About 147 square meters (sqm) of the building are exclusively used for VATable activities (i.e., real estate agency services) while 16 sqm are exclusively used for VAT- exempt activities (i.e., insurance services). The remaining part of the building, which measures 197 sqm, is used for both VATable and VAT-exempt activities.

With regard to the determination of the right to deduct input VAT, the taxable person took a specific approach. The input VAT, which is attributable to the exclusive VAT-exempt or the exclusive VAT-taxable use of the building was calculated based on the actual use (square meters) of the building.  It therefore seems that the taxable person is opting for the possibility to determine the right to deduct input VAT based on actual use. However, there was a large part of the building used for VATable as well as VAT-exempt activities. This part was not exclusively used by one of both activities, but remained at the disposal of both types (e.g., restaurant, reception, etc.). In order to distinguish the use of these square meters between taxable and tax-exempt use, the taxable person calculated the “use” of these square meters using the pro rata approach.

The Supreme Court is of the opinion that in utilizing actual use as a criterion, the actual use of the property as a whole should be taken into account. The “mix” of approaches (actual use and pro rata) was therefore not allowed. Furthermore, the Supreme Court noted that in the case at hand, the actual use approach would not do, since there was a lack of objective and accurate data for this approach. For that reason, the Supreme Court ruled that is not allowed to determine the amount of deductible input VAT with respect to construction of the building partly based on the actual use (i.e., square meters) and for the remaining part of the building, which is used for both for VAT-exempt as well as for VATable activities based on the pro rata approach.