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Richard Knobloch | May 7, 2024

Intention as a key criterion for assessing plots as building plots for VAT purposes?

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We would like to draw your attention to an important judgment of the Supreme Administrative Court (“SAC”) 4 Afs 64/2023-44, which dealt with the assessment of land as construction land for VAT purposes. The land transferred between the contracting parties was undeveloped, but according to the municipality’s zoning plan it was located in its buildable area. The parties assessed the sale as exempt from VAT, while the tax administrator assessed it as taxable and levied VAT. The related dispute was decided by the Supreme Administrative Court.

For the purpose of clarification, we also provide the relevant provisions of the VAT Act governing the exemption and taxation of land transfers (the key text for this dispute is highlighted):

Section 56(1) exempts the supply of land which (a) does not form a functional unit with a building fixed to the ground and (b) is not building plot.

Section 56(2) defines a building plot as a plot, on which

(a) a structure fixed to the ground is to be constructed and (i) which is or has been the subject of construction work or administrative action for the purpose of the construction of that structure, or (ii) in the vicinity of which construction work is being or has been carried out for the purpose of the construction of that structure, or

(b) a structure may be constructed fixed to the ground pursuant to a building permit, a joint permit authorising the siting and permitting of a building or the granting of consent to the execution of a notified building under the Building Act.

As the land transferred was undeveloped at the time of the transfer and no construction work had been carried out on it or in its vicinity for the purpose of future construction, the taxpayer (complainant) based his argument on the fact that the relevant municipal zoning plan could not be regarded as an administrative act for the purpose of construction. In this context, we take the liberty of digressing a little from the contested proceedings and draw attention to two related facts. Firstly, the provisions of the VAT Act refer to the construction of “that structure”, which must undoubtedly be regarded as a specific building and not just a theoretical possibility of building on the land in the future. Secondly, in relation to the relevant provisions of the VAT Act, amended since 2016, the General Financial Directorate has issued information, in which it explicitly refers to the mere submission of a proposal to amend the zoning plan and the commencement of proceedings ex officio as administrative acts for the purpose of constructing “that structure”.

The SAC then cites the case law of the Court of Justice of the EU as a basis for its decision, specifically Judgment C-543/11, where the Court assessed a plot of land that had been developed, but the relevant buildings had been designated for demolition, with the buyer intending to carry out new construction on the land, as a building plot, primarily on the basis of the intention of the parties to develop the land. The key criterion, according to the SAC, is therefore “the intention of the contracting parties to supply/acquire the relevant land as land intended for development, or as land on which a structure fixed to the ground is to be constructed”. The SAC then assessed the intention in question in the contested proceedings, in particular on the basis of (i) the expert report commissioned and the valuation of the land set out therein, (ii) the fact that the purchasers had claimed a VAT deduction in connection with the purchase of the land, (iii) the fact that the seller (the complainant) had obtained planning information confirming the buildability of the land and (iv) the fact that one of the purchasers had filed a motion to cancel the zoning plan in the part that included one of the plots of land in the area for agricultural use. As a result of these considerations, the SAC concluded that the transferred land was construction land for VAT purposes and VAT should have been applied to the transfer.

Last but not least, we would like to point out that the respective provisions of the VAT Act will probably be amended as part of the changes planned to take effect from January 2025. We are, of course, at your disposal if you have any questions.