Advocate General challenges Belgian Adjustment Rules for VAT Deduction on Renovation Works

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

The standard adjustment period is 5 years. For VAT on transactions contributing to the creation of immovable business assets, this period is 15 years, and for buildings rented under the VAT option, it is 25 years. The European directive states that the adjustment period for capital goods is generally 5 years, with the option for member states to extend this to a maximum of 20 years for immovable property, allowing some flexibility in defining 'investment goods' (Articles 187 and 189 of the VAT Directive). Member states must exercise their powers in line with the objectives of the VAT Directive and the principle of fiscal neutrality inherent in the EU VAT system.

Conversion and improvement works on buildings in Belgium typically fall under the 5-year adjustment period. However, this does not apply if the works are so extensive that, for VAT purposes, a new building is created whose transfer or rental can be subject to VAT. This is referred to as a converted building. In practice, there is much debate about what this entails.

Facts

The case in question involves a law firm that owns a building used for both private and economic activities.

Between 2007 and 2015, extensive renovation works were carried out on the building, including installing an archive room in the basement, a new glass annex with offices and an elevator shaft, dismantling the building, installing new insulation and cladding, replacing pipes and connections for gas, water, and electricity, rebuilding walls, laying floors and ceilings, roof adjustments, installing new dormer windows, and creating two roof terraces.

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.

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 following preliminary questions to the Court of Justice:

The Court wants to know whether the Belgian regulation, which applies the extended fifteen-year adjustment period only to renovation works meeting the national criteria of a "new building," conflicts with the VAT Directive, and whether the taxpayer can directly invoke the European directive in case of such a conflict.

Opinion

In this case, all parties agreed that the renovation works should be considered "capital goods" for the adjustment period of the input tax. The discussion only focused on whether renovation works could be regarded as "immovable property acquired as capital goods."

According to the Advocate General, member states have some discretion to define the term "capital goods," but not the authority to do the same for "immovable property acquired as capital goods." The latter term must be interpreted autonomously and uniformly within the EU. To support this, the Advocate General pointed out the differences in the language versions of the term "immovable property acquired as capital goods" in Article 187 of the VAT Directive. The French and Dutch versions refer to "biens d’investissement immobiliers" and "onroerende investeringsgoederen" respectively, while the English and German versions use terms like "immovable property acquired as capital goods" and "Grundstücke, die als Investitionsgut erworben wurden." These different versions can lead to varying interpretations. The French and Dutch versions might suggest that member states have the authority to define "capital goods" and thus also "immovable property acquired as capital goods." However, the English and German versions indicate that "immovable property" and "capital goods" are distinct and autonomous legal concepts.

When there are differences between language versions, the context and purpose of the regulation must be considered. The Advocate General noted that the original proposal for the Sixth Directive provided for a five-year adjustment period for capital goods, without mentioning immovable property acquired as capital goods. The option to extend the adjustment period for immovable property acquired as capital goods to ten years was added later due to concerns from some member states that the five-year period was insufficient for real estate. This implies that the term "capital goods" originally included real estate. Only to allow for a longer adjustment period for real estate was this term separated from capital goods and treated separately. This means that "immovable property" must be exclusively defined by EU law.

Therefore, member states do not have the option to define "immovable property" as Article 189 of the VAT Directive does for capital goods.

Regarding the qualification of the renovation works as "immovable property," the Advocate General referred to the case law of the Court and Article 13 ter of Implementing Regulation No. 282/2011. Neither the Court's case law nor Article 13 ter refers to the processes or services involving elements installed or part of a building.

The Advocate General ultimately concluded that the works should be considered services related to immovable property. These services are treated by Belgium as capital goods for the application of Article 187 of the VAT Directive, but not as "immovable property acquired as capital goods". In this respect, the Advocate General also noted that until July 2006, the Sixth Directive contained no provision corresponding to Article 190 of the VAT Directive, which allows member states to treat services with characteristics of capital goods as such. Recital 5 of Directive 2006/69 explains the introduction of this measure by emphasizing that "services with the nature of capital items may be included in the scheme which allows the adjustment of deductions for capital items over the lifetime of the asset, according to its actual use". The rationale of this provision does not indicate that such services were intended to be equated with the notion ‘immovable property acquired as capital goods’ for which the Sixth Directive had made special provision.

Finally, the Advocate General referred to Article 12 of the VAT Directive, which allows member states to treat the supply of a building after renovation as the supply of a building for first use. However, this does not mean that such renovations should automatically be regarded as "immovable property acquired as capital goods." The Advocate General emphasized that there is no link between Article 12 of the VAT Directive, regarding the "renovation" of buildings, and the term "immovable property acquired as capital goods" as referred to in Article 187.

Regarding the second question, the Advocate General concluded that if the Court does not follow his analysis, Article 187 of the VAT Directive is binding, clear, precise, and unconditional. This means that taxpayers can directly rely on this provision. The article obliges member states to apply a five-year adjustment period to capital goods, with an optional extension to twenty years for immovable property acquired as capital goods.

Commentary

The final verdict is awaited, which can be expected within six months. If the Court endorses the opinion, which it often does, it will have significant implications for the European VAT landscape in the real estate sector. Member states would then need to revise their interpretation of the VAT Directive and possibly adjust their national regulations to align with the uniform interpretation of EU law.

This would mean that renovation works on immovable property, regardless of the duration of use, depreciation period, and economic lifespan of the property after the works, would fall under the same adjustment period. We will follow the final decision of the Court with great interest. To be continued!