The European Court of Justice (ECJ) has recently rendered a decision regarding the VAT taxable amount of the deemed “self-supply” which occurs when a building is used for a VAT exempt activity despite the previous deduction of the input VAT on the construction costs of that building (Case C-16/14 Property Development Company NV).
This decision concerns the situation where a professional builder has put up a new building with the intention of selling it or of granting a right in rem on it, and has consequently deducted the input VAT on the construction costs of the building, whereas the building is ultimately leased without VAT. The question is: what should be done with respect to the previously deducted input VAT.
Deemed self-supply of a building – Determination of the taxable amount
The European VAT directive and the Belgian VAT code provide that, when a building is used as an investment property although it was first built for another purpose (e.g. because it was destined to be sold) so that the input VAT on the building was deductible, a professional constructor is deemed to perform a taxable self-supply and has to pay the VAT on this selfsupply.
The European VAT directive and the Belgian VAT code further provide that the taxable amount of this self-supply should be “the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price, determined at the time of that supply”. According to the Belgian administrative guidelines, for the self-supply of a new building, the taxable amount should be the cost price of the construction, valued at the time of the self-supply. It has long been debated whether this taxable amount of the self-supply should also include the interim interest, i.e. interest paid by the constructor on a loan to finance the construction of the building, and progressively drawn down during construction. The Belgian courts are divided on this issue.
Belgian Supreme Court: Taxable amount based on the cost price of the building, including the interim interest
In a case that came before the Supreme Court, the new building first appeared as stock in the accounts of the professional constructor, as it was destined to be sold. In valuing that stock, the constructor capitalised the interim interest as part of the value of the building. However, in anticipation of the sale of the building, the constructor had leased out parts of the building.
According to the Supreme Court, the professional constructor removed the building from the stock account to use it as an investment property, and, therefore, carried out a VAT taxable self-supply based on the cost price of the building, including the interim interest (Supreme Court, 19 January 2012). The Supreme Court thus set aside the judgment of the Court of Appeal of Antwerp regarding the question of interim interest, and referred the case to the Court of Appeal of Ghent.
Such interim interest was not subject to VAT and thus did not give rise to any VAT deduction. The fact that VAT would become due on the interim interest at the time of the deemed self-supply took place, raised questions regarding compatibility with the principle of neutrality of VAT. The Court of Appeal of Ghent thus decided to suspend the proceedings and to refer the question regarding the interim interest to the ECJ.
ECJ-Case Property Development Company – Taxable amount based on the purchase price of similar buildings, irrespective of whether this price includes interim interest
According to the ECJ, when a building is not purchased but is built, and when there are similar buildings on the market (i.e. buildings whose location, size and essential characteristics are similar), the taxable amount for the self-supply is, in principle, the purchase price of similar buildings at the time the self-supply occurred. Only in the absence of a purchase price for the property or for similar properties, is the taxable amount determined on the basis of ‘cost price’.
If the taxable amount is determined on the basis of the purchase price of similar buildings, the ECJ considered that it is irrelevant to know whether the purchase price of similar buildings includes interim interest which may have been paid during their construction.
Consequences for the real estate sector\
The Belgian VAT Authorities have not yet commented on this ECJ decision, but it might have a negative impact for professional constructors who have to perform such a deemed self-supply. The value of a similar building at the time of the self-supply, might be higher than the actual construction costs (whether increased or not with the interim interest), so that the VAT to be paid on the self-supply will exceed the previously deducted VAT on the construction costs.
It is regrettable that full focus has been placed on the taxable amount of the self-supply, while the key question has not been addressed: whether such self-supply should be performed at the time when the building is leased -in anticipation of the sale of the building- but is still destined to be sold with application of VAT.
An analysis of each case will be required in order to avoid a situation where a self-supply might have to be made when there is a risk that the building may cease to be used for a VAT taxable activity or sold with application of VAT.