VAT on sale of land with buildings intended for demolition

Recently, the Court of Justice of the EU yet again dealt with the VAT treatment of a supply of land with a building to be demolished to allow for new construction. The judgement in the Herning case (C ‑ 71/18 KPC) reached conclusions different from those in a similar judgement dated more than ten years ago (C - 461/08, the Don Bosco case).

In the recent case, Danish developer KPC Herning purchased a plot of land from the city for a private customer, and then sold it to that customer. Both transactions stipulated the precondition that KPC Herning would build social housing on the land for the customer. At the time of both transactions, an operational warehouse building was located on the land, which the customer undertook to partly demolish, using a third party. The disputed issue was whether the delivery of a plot of land with a building standing on it shall be viewed as delivery of building land subject to VAT if both parties intend to demolish the building and build a new one.

The court first noted that both selling transactions have to be viewed separately. The sole fact that the first sale stipulated the precondition of building social housing on the land cannot link the transitions so as to be viewed as a single supply. The court also noted that the demolition of the warehouse did not form a single supply with the second sale, as it was to be carried out by a third party.

The CJEU further noted that for the purposes of VAT qualification of a supply, objective facts at the time of the supply have to be considered. At both sales, the warehouse located on the land being purchased was fully operational, and no demolition work had been be initiated. Also, none of the parties had been charged with the demolition.

In the CJEU´s opinion, therefore, none of the sales increased the economic value of the property being sold and did not give rise to added value significant enough to make them subject to VAT. Furthermore, a supply cannot be qualified solely based on the parties’ intention, as this would be contrary to the principles of the VAT Directive. The court thus concluded that a supply of land on which a warehouse building is located cannot be viewed as the sale of building land which is subject to VAT.

The older judgement in the Don Bosco case involved a sale of land with buildings that were to be demolished to allow for a new construction, while, in this case, the selling party effected both the delivery of the property and the demolition. Moreover, the demolition started already before the land was delivered. In this older case, the court therefore ruled that the delivery of the land and the demolition of the building formed a single supply whose subject was not the delivery of the existing building, but a delivery of undeveloped land. Therefore, the VAT exemption could not be applied here.