CJEU: Imofloresmira – Investimentos Imobiliários v Autoridade Tributária e Aduaneira (C-672/16)

The decision of the CJEU in Imofloresmira , delivered on 28 February 2018, confirms that property owners have a VAT deduction right for property purchases - even if parts of the properties are not rented out - as long as the owner is able to show in an objective manner that it has the intention to rent it out.

Imofloresmira is engaged in the purchase, sale, renting and management of commercial and mixed properties which are owned by Imofloresmira or by third parties. For reasons beyond its control, certain parts in two properties, and for which it had opted for taxation, were not rented out for more than two years. During this period, Imofloresmira ensured a continuous commercial promotion of available spaces for rent within those properties through various marketing operations, such as the creation of a brochure, a mailing list and a website, the issuance of press releases to a wide audience, and the display of advertising panels on the part of the properties concerned. Even though these parts were not rented out for over two years, Imofloresmira had not made any adjustment to the deducted VAT. However, following an audit, the tax authorities concluded that Imofloresmira should make the adjustment of the tax deducted for the parts of the properties that were not rented out since adjustments had not been made.

In the case at hand, the referring court asked whether national legislation can provide for the adjustment of the input VAT deducted based on the fact that a property, in respect of which the right of option for VAT has been exercised, is regarded as no longer being used (rented out) by Imofloresmira for its VAT taxable business for over two years, even where Imofloresmira has sought to rent it during that period.

The CJEU ruled that Imofloresmira has the right to deduct input VAT for the purchases of parts of the properties that were not rented out, provided that it still has the intention to rent out parts of the properties, and as long as this intention is accompanied by objective measures.

As a result of this ruling, there is more certainty as to the VAT treatment of properties that are temporarily not being rented out. However, there remains some uncertainty on what would happen in circumstances similar to the case at hand when the next rental would be VAT exempt. For Dutch practice, the ruling from the Supreme Court should in principle still apply.