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A recent Dutch Supreme Court ruling that significantly affects whether a renovation can be qualified as an “essentially new construction” for tax purposes was just confirmed by another Supreme Court decision issued on November 11, 2022—this time in a case involving a wool factory in Tilburg that wanted to apply a transfer tax exemption.

In line with last week’s Supreme Court ruling, the court confirmed that the renovation of the Wollenstoffenfabriek (wool factory) did in fact qualify as an “essentially new construction” for tax purposes. The court concluded that, in particular, the changes in the building construction were decisive for qualifying whether the renovated immovable property was a renovated “old construction or if it was essentially a “new construction,” which would make the supply subject to VAT and exempt from the real estate transfer tax.

It is important to note that such factors as a change of function of the building, its architectural identity, external identity are neither in themselves, nor taken together, decisive or necessary to qualify it as an “essentially new construction.” This broad interpretation of the building construction factor creates new opportunities to apply the transfer tax exemption to converted buildings and renovations.

Facts and circumstances

The buyer acquired, in three phases, four building parts of a former wool factory complex. Three of the four parts were completely demolished and rebuilt into a new construction. The fourth part included a national monument as well as an old factory, which was renovated/transformed into a retail center, at a cost of more than 10 times the purchase price.

When converting the former factory into a retail center, the following works were done:

• The interior walls were demolished.
• A part of the factory building was demolished.
• The roof was renovated with the same external characteristics as the original roof.
• The cast iron columns of the factory building were repaired or replaced.
• A new supporting structure was built.
• Most of the floor was renovated (including adjustments to the foundation).

The buyer was of the opinion that the acquisition of this new retail center qualified as an essentially new construction, meaning that the buyer could apply the overlapping exemption from the transfer tax. According to the building inspectorate, there was no question of “essentially new construction,” and therefore the concurrence exemption could not be applied.

Course of the ruling

In 2019, the Zeeland-West Brabant District Court had already ruled in the case that, in view of the work carried out, it is plausible for a construction to be modified in such a way that it could be considered to have been “replaced” by a new construction. According to the court, the fact that monumental aspects were preserved does not alter this. The court was therefore of the opinion that a newly manufactured good was delivered and that its delivery subject to turnover tax by law. The exemption from transfer tax then applies. The inspectorate appealed against this decision.

The ‘s-Hertogenbosch Court of Appeal then ruled that there was no question of a newly manufactured good since, in its view, the renovation was aimed at restoring the historically significant parts of the old factory building. The ruling noted the preservation of the external characteristics of the factory. According to the court of appeal, there were no indications in the Supreme Court’s case law that determined the extent to which constructive changes have been made to immovable property.

Subsequently, the interested party filed an appeal in cassation against this decision. But prior to this, Advocate General Cora Ettema stated in her January 3, 2022 conclusions that, since the supporting structure of the building had been radically changed, substantial investments had been made (of almost ten times the purchase price) and the building had taken on a new purpose as a retail center, the only conclusion to be drawn was that the interventions were of such nature that the construction was transformed into an essentially new construction; therefore, it is a newly manufactured good for VAT purposes.

In its decision, the Supreme Court partly follows the view of AG Ettema. According to the Supreme Court, changes in the building construction are decisive. It found that only such changes, including a replacement (of part) of the existing building construction, can justify the conclusion that a renovation was so drastic that a new building was essentially created as a result. It is of the opinion that the activities described above entail such far-reaching changes in the architectural construction that no other conclusion can be drawn than that the activities at the Wollenstoffenfabriek resulted in an “essentially new construction.”

Practical consequences

This decision is a confirmation of the Supreme Court’s earlier (November 4) ruling—that for a building to be considered an “essentially new construction,” it must involve major changes in the building construction. The Supreme Court itself acknowledges that the changes must be assessed a case-by-case basis. And even if the external characteristics do not change, a renovation could still transform a building into an “essentially new construction.” Therefore, it is always advisable to clearly determine in advance which activities will be performed in order to correctly determine whether such far-reaching changes have occurred. Work solely on the inside of a construction can also lead to a newly constructed property for VAT purposes and therefore would render it eligible for the concurrent transfer tax exemption. In short, there are plenty of options.