European Court to reassess VAT deduction rules for improvement works

Mar 20
The Belgian VAT rules for real estate are often the subject of discussion, both within Belgian and European contexts. Last week, a hearing took place in an interesting pending case at the European Court (C-243/23 Drebers). This case has the potential to significantly revise the Belgian rules for determining adjustment periods for renovation works. During the hearing, the positions of both parties were presented to the Court.

The outcome of this case could have considerable consequences for the European VAT landscape in the real estate sector.

The VAT deduction for the purchase of business assets is subject to adjustment rules. These rules are found in various provisions, including Article 48(2) and Article 49 of the Belgian VAT Code, as well as in Royal Decree No. 3.

The standard adjustment period is 5 years. For VAT levied on actions contributing to or aimed at the creation of immovable business assets, this period is 15 years, and for buildings leased under the VAT option, it is even 25 years. The European Directive, on the other hand, specifies that the adjustment period for capital goods is in principle 5 years, with the option for Member States to extend this up to a maximum of 20 years for immovable capital goods. This extension allows Member States a certain margin to define 'capital goods' (Articles 187 and 189 of the VAT Directive). Member States must exercise this authority with the objectives of the VAT Directive and the principle of fiscal neutrality inherent in the EU VAT system in mind.

In Belgium, conversion and improvement works on buildings also fall under the 5-year adjustment period as a standard. However, this is not the case if the works are so substantial that they result in the construction of a new building for VAT purposes, which can be sold or leased with VAT. This scenario is referred to as "converted buildings". In practice, there is much debate over what constitutes such a “conversion”.


The case in question involves a law firm that owns a building used for both private and economic activities. Between 2007 and 2015, the building underwent extensive renovation works. From January 1, 2014, the VAT exemption for lawyers in Belgium was abolished, making the law firm's services subject to VAT. At that point, the law firm claimed an adjustment of the previously non-deducted VAT based on the 15-year adjustment period.

Following a tax audit, the tax authorities concluded that several breaches of the VAT legislation had occurred between January 2014 and September 2015, resulting in a correction notice of €163,756.24 in due VAT. Part of this adjustment notice related to the rejection of the adjustment of VAT incurred in the past due to historical renovation works. According to the tax authorities, the renovations did not result in a new building. Thus, in the tax authorities' view, an adjustment period of 5 years should be applied instead of 15 years.

On the other hand, the taxpayer believed that the renovations were subject to a 15-year adjustment period. As a result, he argued that he should be able to recover some of the VAT paid before the introduction of the VAT liability. The dispute ultimately had to be settled in court.


In defense against the tax authorities, the taxpayer argued that the strict transposition of the concept of 'immovable investment goods' into national law contradicts the VAT Directive. According to the taxpayer, this concept generally refers to goods with a longer period of use, depreciation, and economic life in the EU context. He claimed that the economic life of the property, extended by the works or renovations, is relevant for its classification as an immovable investment good under the VAT Directive.

Furthermore, the taxpayer referred to the principle of tax neutrality, which requires that all immovable investment goods with a comparable economic life should be treated equally under VAT, including the same adjustment period.

Given the doubts about the conformity of Belgian legislation with EU law, the taxpayer proposed submitting preliminary questions to the Court of Justice of the European Union (CJEU).

Preliminary Questions

The Court of Appeal addressed the taxpayer's request and referred the following preliminary questions to the CJEU:

1. Do Articles 187 and 189 of Council Directive 2006/112/EC 1 of 28 November 2006 on the common system of value added tax preclude legislation such as that at issue in the main proceedings (namely Article 48(2) and Article 49 WBTW, read in conjunction with Article 9 KB No 3 of 10 December 1969, relating to the deduction facility for the application of value added tax), according to which the extended adjustment period (of 15 years) in the case of the renovation of an existing building is applied only if, after completion of the works, on the basis of the criteria under national law, there is a ‘new building’ within the meaning of Article 12 of the aforementioned Directive, whereas the useful economic life of a substantially renovated building (which, however, on the basis of the administrative criteria under national law does not qualify as a ‘new building’ within the meaning of the aforementioned Article 12) is identical to the useful economic life of a new building, which is considerably longer than the period of five years referred to in the aforementioned Article 187, which is shown, inter alia, by the fact that the works carried out are depreciated over a period of 33 years, which is also the period over which new buildings are depreciated?

2. Does Article 187 of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax have direct effect, so that a taxable person who has carried out works on a building without those works leading to the renovated building being classified as a ‘new building’ within the meaning of Article 12 of that directive on the basis of criteria under national law, but where those works have a useful economic life which is identical to that of such new buildings to which a 15-year adjustment period does apply, may rely on the application of the 15-year adjustment period?

In other words, the Court wants to know whether the Belgian regulation, which applies the extended 15-year adjustment period only to renovations that meet the national criteria of a "new building," is contrary to the VAT Directive when the economic life of a thoroughly renovated building is identical to that of a new building, and whether the taxpayer cannot directly rely on the European Directive.

It is now up to the Court of Justice to decide on the future of the (Belgian) VAT adjustment rules for real estate investments. And as we know, this Court is not afraid to be creative.