Dutch Supreme Court Seeks Clarity on Key VAT Questions
In the European real estate market, the VAT treatment of property transfers can make or break a deal. A recent decision by the Dutch Supreme Court (21 November 2025) highlights just how significant the VAT consequences can be, especially when newly created residential property is sold in a rented state after redevelopment.
The central issue is whether such a transaction qualifies as a Transfer of a Going Concern (TOGC) under article 37d of the Dutch VAT Act (implementing article 19 of the EU VAT Directive). If the TOGC rule applies, the transfer falls outside the VAT system. If not, the property may be treated as “new real estate” subject to 21% VAT which the buyer cannot deduct when continuing VAT-exempt residential leasing.
Because existing EU case law leaves room for interpretation, the Dutch Supreme Court has asked the Court of Justice of the European Union (CJEU) for clarification. The outcome will have major implications for developers, investors, asset managers, and anyone active in residential transformation and build-to-rent projects.
#1. Background: From Office Building to Residential Investment
The case concerns an older office building purchased in 2015 and converted into 77 residential apartments. Before the renovation was completed, the owner entered into binding lease agreements with future tenants and concluded service contracts required for operational rental. All VAT on the renovation and construction costs was deducted, as the owner indicated that the property was being developed with the intention to sell in the future. The facts and timeline of the case are illustrated below:
Shortly after completion, the fully rented property was sold to an investment fund without Dutch VAT, based on the view that the sale qualified as a TOGC.
The tax Authorities disagreed, arguing that the seller acted as a project developer, not a landlord, and that the rental phase merely served to enhance the salability and price of the property. The Court of Appeal ruled in favor of the seller, but the Dutch Supreme Court identified inconsistencies in EU case law and referred two key questions to the CJEU.
#2. Two EU VAT Questions with Significant Market Impact
1st question: Can TOGC apply to a fully VAT-exempt activity?
In this case, the operation involving residential leasing, is a fully VAT-exempt activity. The seller would have no right to deduct input VAT by the transfer, and the sale itself would also have been VAT-exempt if not for its classification as “new real estate.”
The Supreme Court now asks whether the TOGC provision, designed to simplify taxation and avoid unnecessary VAT liquidity burdens, can still apply in situations where both the seller and the buyer operate fully exempt activities. A narrow view would limit TOGC to cases where the buyer has deduction rights; a broader interpretation, supported by some ECJ rulings, suggests TOGC can apply even in exempt sectors.
2nd question: Does the developer’s intention matter?
A critical practical question is whether it is sufficient that the property was actually rented and sold in a rented state, or whether the Tax Authorities must also assess the developer’s intention:
- Was the rental operation set up with a genuine plan to run a long-term leasing business? Or;
- Was it a temporary step aimed purely at making the property more attractive for sale?
Some CJEU rulings treat intention as relevant; others focus solely on objective continuation of economic activity. This uncertainty affects how developers structure leasing phases in new-build and conversion projects.
#3. Judgment Arnhem-Leeuwarden Court of Appeal and Opinion of the Advocate General (AG)
Judgement Arnhem-Leeuwarden Court of Appeal
The Arnhem-Leeuwarden Court of Appeal reached a markedly broad interpretation of article 37d, holding that the sale of the fully rented apartment complex did qualify as a TOGC. According to the Court, the building, together with the running leases and related service arrangements, constituted an autonomous economic activity capable of being continued by the purchaser. The Court explicitly noted that the seller actually performed this economic activity and that subjective intentions about whether the seller saw itself as a developer or a landlord were irrelevant.
The Court further considered it sufficiently demonstrated that the buyer continued the leasing enterprise, as the leases and service agreements remained in place and the apartments continued to be exploited in the same manner. The fact that the buyer resold the property shortly thereafter did not break the continuity of the economic activity.
AG Opinion
The Advocate General supported the Court of Appeal’s approach, finding that it applied the correct EU law standard. Consistent with CJEU case law, the AG emphasized that the assessment of whether an economic activity is carried out, and whether it is transferred, must be based on objective factors, not on the parties’ strategic intentions. The AG rejected arguments that the seller’s profile as a project developer would preclude TOGC treatment, especially because the Netherlands has not implemented specific anti-abuse measures under article 19 VAT Directive for this area.
The AG also agreed that the leasing activity was sufficiently sustained and structured to qualify as an autonomous economic activity. The continuation of the rental operation by the purchaser was, in the AG’s view, a factual finding that was neither illogical nor insufficiently reasoned.
Finally, the AG observed that the remaining disputes, notably whether the extensive transformation works constituted “essentially new construction” involve fact-intensive assessments. Therefore, if the Supreme Court were to overturn the TOGC conclusion, those unresolved issues should be examined by a lower court on referral.
#4. Why this matters for the Real Estate Sector
In practice, there has been uncertainty for years about the scope of Article 37d of the Dutch VAT Act 1968, particularly when newly developed and already-let property is transferred from a developer to an investor. The Supreme Court’s referral to the CJEU means that clear guidance will not be available for some time and may even broaden the range of questions that need to be answered.
Under the EU VAT Directive, when goods have been used exclusively for VAT-exempt activities (and no input VAT deduction was possible), their subsequent supply must also be VAT-exempt. Dutch law, however, limits this rule to movable goods. Because of that restriction, newly developed property sold within two years of first occupation is automatically subject to VAT, and the buyer benefits from Dutch real estate transfer tax (RETT) relief through the concurrence rule.
In such a case, the developer can deduct the VAT on construction costs, but the investor, who continues VAT-exempt residential leasing, cannot recover the VAT charged on acquisition. The 21% Dutch VAT therefore becomes a final cost, often making long-term residential investment significantly less attractive. RETT relief still applies, but offers only limited benefit compared to the VAT impact. See below the illustration for VAT application in current practice.
With the Supreme Court now questioning the application of TOGC in these situations, two (desirable for business) alternative scenarios may arise:
1. Incorrect implementation of the EU VAT Directive
If the CJEU rules that the Netherlands has implemented the Directive too narrowly by restricting the mandatory VAT exemption to movable goods only, then the sale of newly developed residential property used solely for exempt letting would also need to be VAT-exempt. In that case, the buyer’s acquisition would be subject to RETT at the lower rate of 10.4% instead of 21% VAT. See below the illustration for VAT application in case Article 136 VAT Directive also applies to immovable goods.
2. TOGC applies to these transactions
The CJEU may also confirm that Article 37d Dutch VAT Act can apply in such situations, allowing the sale of a rented residential building to qualify as a TOGC. The transaction would then fall completely outside the scope of VAT, no RETT would be due, and the rental business, including tenants and service contracts, would continue uninterrupted with the buyer.
Although the developer cannot deduct construction VAT in this scenario, this is generally far less burdensome than charging 21% Dutch VAT on the sale price. For investors, this outcome is highly favorable, as it avoids a substantial unrecoverable Dutch VAT cost. However, such a result may prompt the Ministry of Finance and potentially the Dutch legislator to reconsider the scope of the concurrence exemption or to introduce compensatory measures to address the resulting loss of Dutch VAT revenue.
#5. Now what?
We, the VAT advisors at Archipel, will closely monitor the developments in this case and the upcoming CJEU judgment, as the outcome will influence structuring, timing, and documentation of real estate transactions across the market.
In the meantime, there is much that businesses can already do. We assist clients in:
- assessing whether their development and leasing strategy supports TOGC treatment;
- designing commercially viable structures for long-term residential investment;
- analyzing the VAT recovery position on construction and redevelopment costs;
- evaluating whether temporary leasing activity qualifies as genuine economic activity;
- planning transaction timing to optimize VAT outcomes and minimize revision risks;
- preparing documentation that aligns intention, economic reality, and legal requirements.
With the right planning, businesses can significantly reduce Dutch VAT (or VAT in general) exposure, protect investment returns and avoid unpleasant surprises during audits or deal execution.
If you would like tailored advice on your development pipeline, leasing strategy, or acquisition structure, Archipel’s VAT team is ready to support you.
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