'Essentially new build’ requires a substantial alteration of the building structure

As a general rule, the transfer of Dutch real estate is in principle subject to real estate transfer tax. If the transfer takes place within two years after a building’s first occupation, the transfer is in principle also subject to value added tax (VAT). If both taxes are due, the buyer may, under certain conditions, apply for an exemption from a real estate transfer tax.

The foregoing also applies to a ‘first occupation’ that takes place after a building is renovated, provided the renovation has produced a ‘newly constructed building’. This category is also referred to as 'essentially new build’. The practical significance is that VAT due in connection with the transfer may be deductible as input VAT.

In case law, there was uncertainty about the interpretation of the term 'essentially new build’. In addition to any changes to the building's structure, the interpretation of the term also took into account the building's architectural identity and external recognition, whether or not there had been a change of function, and the capital invested in the renovation. The interpretation of these criteria resulted in renovations with strong similarities being classified as ‘essentially new build’ in some cases and as mere renovations in others.

On 4 November 2022, the Dutch Supreme Court underlined that a renovation should not easily be considered so substantial that it essentially creates a newly constructed building, and that for this to happen, there will at least have to be substantial changes to the building's structure.

The transformation
In the case that led to the Supreme Court ruling, an office building had been transformed into a hotel. The conversion had cost around EUR 7 million. The building had been gutted on the inside, but the existing structure of the building had remained unchanged. Piping had been replaced and certain modifications had been made to bring the building up to modern standards. But the roof, floors, stairs, ceilings and lifts had been left intact. The conversion had not resulted in an increase in floor space, nor had the appearance of the building been changed.

The dispute
After the transformation, the building was sold and transferred to a new owner, and real estate transfer tax was levied. The buyer objected and appealed. According to the buyer, the transformation of the office building into a hotel building had led to a newly constructed building, and for that reason the transfer of the building should have been taxed with VAT only and exempted from real estate transfer tax.

In its ruling of 31 January 2022, the District Court of Zeeland-West Brabant noted that there was no uniform interpretation of the term ‘essentially new build’ in case law. The court noted that while it had applied certain criteria in previous rulings, it was unclear whether those criteria were correct, whether all criteria should be considered necessary, and whether some criteria weighed more heavily than others. Because of these ambiguities, the court decided to submit preliminary questions to the Supreme Court.

Supreme Court
In its judgment of 4 November 2022, the Supreme Court answered the questions as follows:

"In answering the question of whether a new building has essentially been created, it is necessary to determine what has happened to the existing building in structural terms. Only changes to the building structure, including replacement (of part) of the existing building structure, can justify the conclusion that a conversion has been so substantial that it has essentially created a new building. Whether such changes have been so substantial depends on the circumstances of the case. A renovation will not quickly be so drastic that it essentially creates a manufactured building within the meaning of Section 11(3)(b) of the VAT Act [Buren: now Section 11(5)(b) of the VAT Act].

The other factors mentioned by the District Court in its preliminary ruling question - namely changes in the architectural identity/external recognizability, changes in function in terms of possibilities of use, the size of the investments made and the added value realized by renovation - may, like other factors, be indications for the finding that a renovation has been so substantial from an architectural point of view that essentially a new building has been created. They are however neither decisive, either in isolation or taken together, nor necessary. "

Analysis
There was uncertainty in practice about the interpretation of the term 'essentially new build’. This judgment has removed some of that uncertainty. The Supreme Court has clarified that a renovation will not soon be considered so substantial that it creates a essentially new build, and that there will at least have to be a change in the building's structure.

Other factors, such as changes in the architectural identity or external recognition of the building, changes in function, the amount of the investment and the added value realized, may, according to the Supreme Court, be indications that a new building has been created, but are not necessary for that conclusion. Whether those factors play a role, and what weight should be given to each factor, depends on the circumstances of the case.

Some of the uncertainty regarding the interpretation of the term 'substantially new build’ thus remains. Our expectation is that in many cases it will remain difficult to assess whether a renovation has resulted in ‘essentially new build’.

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