The Dutch Supreme Court has recently rendered several important judgments on the classification of property as residential for transfer-tax purposes and on the treatment of lock-up-garage leases under the VAT rules. The upshot of these judgments is summarised below.

Meaning of "residential" for the purposes of transfer tax

Real estate transfers are taxed at the rate of 2% if the property is residential and 6% in all other cases. On 24 February 2017 the Dutch Supreme Court rendered four judgments in which the main issue was which of these rates applied. In three of the four cases, the Court followed Advocate-General Wattel's recommendation and applied the lower 2% rate.

The term "residential" is not defined in the transfer tax rules and in practice often leads to disagreements between tax inspectors and taxpayers. The Court held that the determination of whether real estate is residential depends, first and foremost, on (i) its original architectural character (an objective criterion) and (ii) its intended use. The real estate's actual use and the duration of any such use are not decisive for this determination. According to the Court, the next question is whether the original architectural character has subsequently been altered and, if so, for what purpose and with what objective effect. In order for the classification of real estate to change from non-residential to residential (or vice versa), the alteration must have affected the property's architectural character and function. Only if there is still doubt after applying this two-part test may the property's designated use under public law (i.e. its zoning) also be taken into account.

The four Supreme Court judgments help clarify the meaning of the term "residential property" despite the absence of a legislative definition. However, it remains essential to carefully analyse the facts and circumstances of each case.

Lock-up garages not multi-functional for VAT exemption purposes

Real estate leases are exempt from VAT but this exemption does not apply if the real estate consists of a "parking area for vehicles": such leases are in principle subject to VAT at the rate of 21%. On 10 February 2017 the Dutch Supreme Court had to decide whether lock-up garages that were in fact being used for storage purposes could be classified as multi-functional (rather than as parking areas) and whether the leases of such garages were therefore exempt from VAT. The Court's answer was no, on the grounds that lock-up garages are, by their nature (i.e. layout), primarily intended for use as parking areas. The fact that they can be or are in fact used for some other purpose does not result in their being classified as multi-functional rather than as a parking area (at least not in the absence of a contractual clause excluding the use of the garage as a parking area). According to the Court, the primary nature of the leased real estate, and not its actual use, is decisive for whether it will be classified as a parking area or as multi-functional. The Court was not convinced that the facilities in the relevant garages made them particularly suitable for purposes other than parking vehicles.