Only "new buildings" can be sold with VAT. For VAT purposes, a building remains new until December 31st of the second year following the year of occupation.

However, according to the administrative doctrine, old buildings may also be transformed into new buildings. The building must undergo major changes in the essential elements of the building, i.e. the nature, structure and, where appropriate, the destination.

On the other hand, the 60% rule may also be used to determine when a renovated building can be transformed into a "new" one: the value of the work must exceed 60% of the sale price of the building (excluding land) after completion of the renovation works. However, this rule can only be applied in situations where there is doubt as to whether the changes made to the building's essential elements are substantial. Merely improving the comfort of a building will not qualify it as a "new" building.

The European Court of Justice has also addressed the issue of building conversions in its Kozuba ruling (ECJ, November 16, 2017, C-308/16). In this Polish case, the Court stated that a building must undergo significant changes, aimed at changing its use or altering its occupancy circumstances, in order to be considered as converted into a new building. The Court emphasized that the term "conversion" is a concept under EU law and must be interpreted consistently across national legislation. The VAT Directive leaves room for the inclusion of a quantitative criterion in national legislation (in Poland, a conversion was considered to have taken place if the improvements were worth at least 30% of the building's original value).

What is the case about?

The case essentially concerns a VAT group that had carried out an adjustment of input VAT revision following a change in legislation, making lawyers subject to VAT.

During a VAT audit, the tax authorities found that the taxpayer had adjusted too much VAT in its favour. This was due to the fact that the taxpayer had considered the upgraded building as a new construction (instead of a renovated old building), leading to an adjustment VAT period of fifteen years (instead of five years).

The amount of VAT to be adjusted in this case therefore depended only on the question whether or not the construction works resulted in a new building.

According to the Court of Appeal in Ghent, the question of whether a renovation can be considered as a new construction is not necessarily dependent on whether or not there have been structural changes. The Court states that a qualitative evaluation based on European law is necessary and that the value added by the renovation can be taken into account. If the renovation is substantial enough, the building can be considered as new (see Kozuba ruling, paragraph 55). Unlike administrative comments, it is not necessary to first look at whether the existing building has undergone substantial changes in its essential elements.

In this case, the court finds that the work carried out on the building in question was undeniably very significant, making up 71.5% of the value of the building after completion. Under these circumstances, the court concludes that the building must be considered a "new building" for the purpose of VAT.

Comments

A new building is treated differently for VAT purposes than an old building, which is why it is important to determine whether a building is old or new. For a new construction, this is not difficult. For existing buildings that are being upgraded, it is not always easy to determine if the works are to be seen as a simple renovation or a transformation into a new building.

The VAT legislation does not provide a definition of these concepts. Whether construction works result in a new building is always a question of fact that must be considered on a case-by-case basis.

This also leads to difficult discussions with the tax authorities, who often refer to their administrative guidelines.

The Court hereby makes it clear again that these guidelines are not a formal legal source and can only be used by the taxpayer as a basis for establishing a right to rely on the principle of legitimate expectations set by the tax authorities.

Contrary to what the administrative comments prescribe and what the tax authorities may claim, significant improvement works can indeed result in new construction, even when the works do not involve major structural changes to the building.

Source: Ghent, November 22, 2022, case number 2021/AR/1561