VAT or Exemption? EU Court clarifies VAT treatment of land with foundations

Lomoco Development ApS, a Danish company, owned sixteen plots on which prefabricated foundations for residential buildings were laid before 1 January 2011. The foundations were completed in 2010, but the plots were only sold in 2015.

The Danish tax authorities considered these transactions as the supply of "building land" and therefore imposed VAT (NB: under the VAT Directive, the supply of building land is subject to VAT). However, Lomoco argued that the transactions involved the supply of "buildings or parts of buildings," which in Denmark are exempt from VAT if construction began before 1 January 2011.

In other words, Lomoco believed that the presence of foundations was sufficient to classify the plots as "buildings", making the sale exempt from VAT.

Preliminary question

The case was ultimately referred to the Court of Justice due to uncertainties about the definition of “building” and “building land” in the VAT Directive.

The core question was whether land on which only foundations are laid should be considered:

Judgment

The Court began by analyzing the relevant provisions of the VAT Directive. Article 12(1) requires Member States to impose VAT on the supply of a "building or part thereof” and the “land on which the building stands" before its first use, as well as on the supply of "building land." Article 12(2) defines a building as " any structure fixed to or in the ground".

The Court emphasized that the definition of a "building" must be read in conjunction with the criterion of "first use." A building must be functionally and sufficiently complete to be put into use.

Foundations alone are insufficient to classify land as a building, as they do not yet make the land suitable for actual use.

Foundations are merely the beginning of a structure and constitute a preparatory phase. Therefore, the Court concluded that land with only foundations cannot be considered "buildings" under the VAT Directive. Instead, they must be regarded as "building land". This means that the supply of such land is subject to VAT under Article 12(1)(b) of the Directive.

Commentary

The Court emphasizes that a "building" must be a structure that is functional and can actually be used. Foundations are merely a preparatory phase and do not make the land suitable for use.

In Belgium, in principle, only new buildings can be sold with VAT applied; the supply of land (whether or not it is ready for construction) is, in principle, exempt from VAT. The differing VAT treatment of building land in Belgium (exempt) versus the Directive (taxable) is a historical so-called standstill clause. Land sold along with a new building (see the definition of “associated land” in Article 1, §9, 2° of the Belgian VAT Code) follows the same VAT treatment as the supply of the building (Article 44, §3, 1° of the Belgian VAT Code).

According to administrative commentary, the concept of a "building" includes not only traditional structures such as houses, commercial buildings, and industrial infrastructure but also other structures permanently fixed to the ground, such as infrastructure works (e.g., sewage systems, electrical lines, roads, etc.). This refers to the definition of a building included in Article 1, §9 of the Belgian VAT Code: “a building or part of a building is any structure permanently fixed to the ground.” The same definition appears in the VAT Directive (Article 12(1)).

For VAT purposes, a building is considered new until 31 December of the second year following the year in which it was first used or taken into possession. Belgium applies both the "possession" and "use" criteria. Thus, a building remains classified as new until 31 December of the second year after the year it was first occupied or taken into possession, regardless of whether it is already functionally in use. The concept of “possession” was specifically introduced to allow structures that do not fit the traditional definition of a building to fall under VAT.This raises the question of whether the Court of Justice's ruling can be applied directly in Belgium.

In fact, Belgium faces precisely the opposite issue from that discussed in the judgment: the supply of a new building by a professional developer or reseller or by an occasional VAT taxpayer is subject to VAT. The supply of undeveloped (building) land is exempt from VAT. Nevertheless, it remains interesting in such cases to determine whether it is indeed the supply of a "building" (with associated land) in the VAT sense. Since in Belgium, a structure is potentially classified as a "building" for VAT purposes more quickly than according to the interpretation of the Court of Justice, VAT may be charged more frequently. This can be advantageous for businesses wishing to recover VAT on already constructed structures. Given the direct effect of the VAT Directive, taxpayers selling land with structures could rely on the direct effect of the VAT Directive to avoid charging VAT in such.

In short, the last word has (again) not been said…