Flashback on ECJ Cases C-308/16 (Kozuba Premium Selection sp. z o.o.) – Exemption for the supply of a building or parts thereof, and of the land on which it stands

On November 17, 2016, the ECJ issued its decision in the case C-308/16 (Kozuba Premium Selection sp. z o.o.). The case dealt with the concept of “new building”.

Context: Reference for a preliminary ruling — Taxation — Common system of value added tax (VAT) — Directive 2006/112/EC — Article 12(1) and (2) — Article 135(1)(j) — Taxable transactions — Exemption for the supply of buildings — Concept of ‘first occupation’ — Concept of ‘conversion’

Article in the EU VAT Directive

Article 12(1)(a) and (2) and article 135(1)(j) of Council Directive 2006/112/EC

Article 12 (Taxable transaction)
1. Member States may regard as a taxable person anyone who carries out, on an occasional basis, a transaction relating to the activities referred to in the second subparagraph of Article 9(1) and in particular one of the following transactions:
(a) the supply, before first occupation, of a building or parts of a building and of the land on which the building stands;
(b) the supply of building land.
2. For the purposes of paragraph 1(a), “building” shall mean any structure fixed to or in the ground.

Member States may lay down the detailed rules for applying the criterion referred to in paragraph 1 (a) to conversions of buildings and may determine what is meant by “the land on which a building stands”.
Member States may apply criteria other than that of first occupation, such as the period elapsing between the date of completion of the building and the date of first supply, or the period elapsing between the date of first occupation and the date of subsequent supply, provided that those periods do not exceed five years and two years respectively.

3. For the purposes of paragraph 1(b), “building land” shall mean any unimproved or improved land defined as such by the Member States.

Article 135 (Exemption)
1. Member States shall exempt the following transactions:

(j) the supply of a building or parts thereof, and of the land on which it stands, other than the supply referred to in point (a) of Article 12(1);

Facts

In 2005, an associate of Kozuba contributed a residential property located in Poland, which had been erected in 1992, to the company.
One year later, Kozuba refurbished the property at a cost of 55% of its initial value. Upon completion in 2007, Kozuba included the building in its fixed asset register under the heading ‘show home.’
When Kozuba subsequently sold the building in 2009, they considered the sale VAT exempt on the basis that it was the supply of an old building.
The Polish tax authority disagreed and contended that the sale was not exempt from VAT on the basis that the property was no longer old, given that it had been upgraded and that since that upgrade it had not been subject to a “first occupation” i.e. used for the purpose of any taxable activities by Kozuba.
This arrest covers the concept of “new building”. Supply of new building can be subject to VAT or exempted from VAT, largely depending on domestic rules, i.e. rules of the EU country where the property is situated.
The entitlement to recover input VAT levied on building construction or acquisition usually impacts the profitability of any real estate project. The Court stressed that the concept of “new building” cannot be totally construed by Member States. New building includes also building that was subject to substantial modifications intended to modify the use or alter considerably the conditions of its occupation. The CJEU ruled that Polish law which provided that the first occupation of a property arose only in the context of a taxable transaction was contrary to EU law but that the VAT exemption could be denied in the case of a conversion of a property, where the costs of conversion exceeded 30% of the initial value of the property. Each country has specific rules regarding the VAT treatment of property and these are notoriously complex and we would always recommend VAT advice is sought for property transactions.

Questions

Must Article 135(1)(j) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax ¹ be interpreted as precluding a national provision (point 10 of Article 43(1) of the Ustawa o podatku od towarów i usług [Law on the tax on goods and services] of 11 March 2004 [Dz. U. No 54, item 535, as amended; ‘the Law on VAT’]) under which the supply of buildings, civil engineering works or parts thereof is exempt from VAT save where:

(a) the supply is made within the framework of the first occupation or prior to the first occupation,

(b) the period between the first occupation and the supply of the building, civil engineering works or parts thereof was shorter than 2 years, insofar as point 14 of Article 2 of the Law on VAT defines first occupation as release for use of buildings, civil engineering works or parts thereof, in performance of taxable activities, to the first customer or user, following their:

(a) erection or

(b) upgrade, if the expenditure incurred for the upgrade, as defined in the regulations on income tax, constituted at least 30% of the initial value?

AG Opinion

In the light of the foregoing, I propose that the question referred by the Naczelny Sąd Administracyjny (Supreme Administrative Court, Poland) be answered as follows:

Article 135(1)(j) in conjunction with Article 12(1)(a) and (2) of Council Directive 2006/112/EC on the common system of value added tax must be interpreted as:

(1) precluding the ‘first occupation’ of buildings, civil engineering works or parts thereof necessarily being linked to the performance of taxable activities for the purposes of VAT;

(2) not preventing a Member State from considering, for the purposes of VAT-exemption, that a building has undergone a conversion where the cost of the improvement is at least 30% of the initial value of the building, provided that the improvements are of a substantial nature and affect structural elements.

Decision

Articles 12(1)(a) and 135(1)(j) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as precluding a national law, such as that at issue in the main proceedings, which makes the VAT exemption on the supply of buildings subject to the condition that the first occupation thereof arises in the context of a taxable transaction. The same provisions must be interpreted as not precluding such a national law from making that exemption subject to the condition, in the case of the ‘upgrade’ of an existing building, that the costs incurred have not exceeded 30% of the initial value thereof, provided that that concept of ‘upgrade’ is interpreted in the same way as that of ‘conversion’ in Article 12(2) of Directive 2006/112, namely as meaning that the building concerned must have been subject to substantial modifications intended to modify the use or alter considerably the conditions of occupation.

The ECJ rules:

Legislation that makes the VAT exemption for the supply of a building subject to the condition that the building was first put into use in the context of a taxable transaction is not permitted.
Legislation is permitted, which makes the exemption conditional that, in the case of ‘improvement’ of an existing building, the expenditure for this does not exceed 30% of the initial value of that building, provided that the building concerned has undergone significant changes intended to change its use or to significantly alter the circumstances under which it is involved.

Summary

The Court stressed that the concept of “new building” cannot be totally construed by Member States.
New building includes also building that was subject to substantial modifications intended to modify the use or alter considerably the conditions of its occupation.
The CJEU ruled that Polish law which provided that the first occupation of a property arose only in the context of a taxable transaction was contrary to EU law but that the VAT exemption could be denied in the case of a conversion of a property, where the costs of conversion exceeded 30% of the initial value of the property.
Each country has specific rules regarding the VAT treatment of property and these are notoriously complex and we would always recommend VAT advice is sought for property transactions.

Source