In an order rendered on 15 May 2017, the High Court of Western Denmark held that a case relating to the VAT delimitation between properties with buildings and building land is to be submitted to the Court of Justice of the European Union.
Since 2011, the Danish VAT rules have been designed in such a manner that supply of a building and the land on which it stands is exempt of VAT (the Directive on the common system of VAT article 135(1)(j)), whereas the supply of building land is subject to VAT (the Directive on the common system of VAT article 12(1)(b) and article 135(1)(k). In recent years, the Danish tax authorities, SKAT, have followed a practice according to which land on which a building has already been constructed may be reclassified to building land, if it may be determined that the buyer intends to demolish the existing building after the transfer with a view to constructing a new building. According to SKAT, this also applies even if the seller of the site is not involved in the demolition. SKAT’s practice, which adopts a very wide interpretation of the building land concept, among other things, affects property development projects and the like, in which it will most often right from the beginning be clear that the buyer of the property intends to demolish existing buildings and build something new.
It is much debated whether SKAT’s practice is compatible with the Danish VAT Act (momsloven) and the EU VAT rules and SKAT’s practice has in fact led to a number of requests for binding advance rulings and complaints. In the complaints proceedings, the National Tax Tribunal has not allowed SKAT’s position, but has on the contrary found for the complainants involved in their claim that a legal basis does not exist for the reclassification provided that the seller is not involved in the demolition.
The case before the High Court of Western Denmark relates to a construction company involved in a property development project in which a storage house had been partially demolished and replaced by housing units for young people and where the sellers of the land with the storage house were not involved in the demolition. In a binding advance ruling, the Tax Council had concluded that the site was subject to VAT, but this decision was overturned and changed by the National Tax Tribunal. The order has been brought before the High Court by the Ministry of Taxation.
The order of the High Court of Western Denmark
In the proceedings before the High Court of Western Denmark, the construction company, among other things, submitted that SKAT’s interpretation of the VAT rules is contrary to EU’s VAT rules and that the case should be submitted to the Court of Justice of the European Union for clarification as to the contents of the EU rules.
In its order, the High Court of Western Denmark states that the Court of Justice of the European Union has not considered whether it is compatible with the EU VAT rules to reclassify land with an existing building to building land, except for situations where the seller is responsible for the demolition and a combined service is provided consisting in reality of the provision of a greenfield site. The High Court consequently finds that before a decision can be rendered in the case it is necessary to submit this matter to the Court of Justice of the European Union with a view to obtaining guidance as to how the EU VAT rules are to be understood with respect to whether the supply of land with an existing building where the parties intend that the buyer of the property is to demolish the building in whole or in part may for VAT purposes be considered a supply of building land.
Comments by Bech-Bruun
The order of the High Court of Western Denmark means that the Court of Justice of the European Union will now have the opportunity to make a statement as to whether it is compatible with the EU VAT rules to reclassify land on which a building stands to building land when the seller is not involved in the demolition and – if so – provide guidance on the circumstances under which such reclassification can take place.
The case is hugely important to the construction industry, including property developers and others buying existing premises with a view to construction of new buildings. It is very positive that the High Court has decided to submit the case to the Court of Justice of the European Union in order for the issue to be settled in the right forum to ensure that Danish practice is in accordance with the EU rules. It must be expected that a couple of years will pass until the decision from the Court of Justice of the European Union is obtained.
During the course of the proceedings, the construction company was represented by Kaspar Bastian, lawyer.