The Advocate General has given an Opinion in KPC Herning (Case C-71/18). In this case, the taxpayer entered into a series of contracts to purchase, convert and sell land and buildings. The Danish tax authority ruled that both the first sale and the resale were standard rated supplies on the basis that they constituted sales of building land within the meaning of article 12 Principal VAT Directive (PVD) and hence fell within the exception from exemption set out in article 135 (1) (j) and (k). The Danish government argued that by virtue of Article 12(3) of the PVD, member states are entitled to consider a plot of land such as that in question to be building land, the sale of which would be subject to VAT in accordance with Article 12(1)(b) of the PVD.

The Advocate General, however, held that a national rule under which a supply of land on which there is a building constitutes a sale of building land subject to VAT if the parties’ intention is that the building be demolished to permit construction of a new building is not compatible with the PVD. The Advocate General noted, however, that at the time of the first and second sales the warehouse was still intact and no demolition works had been started. With regard to the first sale, any demolition was to be carried out by a subsequent buyer rather than the taxpayer. It was not certain that the warehouse would be demolished and no activity had been carried out on the property that could enhance its economic value.

DLA Piper Comment:

In recent years, the CJEU has issued two important rulings (i.e., Don Bosco Onroerend Goed (C-461/08) and Kozuba (C-308/16)) dealing with the question whether a plot of land with an existing building may qualify as building land for VAT purposes. Based on these CJEU case rulings, a plot of land with a building on it may qualify as building land if such building (i) will be demolished and replaced by a new building and (ii) the demolition of the building has already started before or at the time the transfer took place.

The question is to what extent a building must have been demolished before it can be qualified as building land. According to the Danish government, a plot of land on which an existing building stands also qualifies as building land, if parties have a clear intention to demolish the existing building and replace it with a new building. The Advocate General does not agree with this line of reasoning and argues that the qualification of building land must be based on the economic reality of the economic transaction.

In our view, the CJEU will likely follow the opinion of the Advocate General that the sole intention to demolish a building and construct a new building is not sufficient to constitute building land for VAT purposes. Hopefully, the CJEU will provide additional guidance as to what extent a building needs to be demolished before it will qualify as a newly constructed building or building land.