No sales tax on sale of leased property

Christiaan Cornet

Tax director

15 mei. `24

Earlier this year, the Court of Justice ruled in a Polish case that the sale of leased property, such as a shopping center, can be classified as the transfer of (a part of) a business, resulting in no VAT being owed on the purchase price. This ruling marks a positive development for project developers or other taxpayers selling real estate in a leased condition. This article discusses its implications for Dutch practice.

No sales tax on sale of leased property

Case Study

A Polish company purchases a shopping center in Poland, inheriting pre-existing lease agreements for the center’s premises. Additionally, intellectual property rights related to the center’s operation and websites are also transferred. The Polish company continues to operate the shopping center.

As part of the sale, the parties opted for a VAT-taxable transaction. The Polish company seeks to deduct the VAT, which the Polish tax authorities refuse. According to them, the transaction qualifies as the transfer of (a part of) a business, exempting it from VAT. The case is brought before the Court of Justice. The Court’s ruling suggests that the transfer of a leased shopping center can indeed be considered the transfer of (a part of) a business, aligning with the Polish tax authorities’ view.

Relevance to Dutch Practice

In May 2022, the Court ruled in two cases concerning the transfer of leased real estate. The Court determined that both cases involved the transfer of a business under Article 37d of the Dutch VAT Act 1968. While the tax inspector considers the seller’s intent significant (a seller’s intent to sell versus lease), the Court finds this intent irrelevant. Appeals have been filed in both cases. We anticipate that, following the Court of Justice’s ruling, the Supreme Court will decide both cases in accordance with the Court’s judgment.

The Court of Justice’s ruling is particularly pertinent in situations where newly constructed real estate is exempt from VAT due to rental activities (e.g., newly built residential apartments), subsequently sold in a leased state to a third party. Application of Article 37d of the Dutch VAT Act 1968 can prevent the sale from being subject to VAT that the buyer cannot deduct, assuming the buyer continues the VAT-exempt rental.