VAT consequences of sale-and-lease-back during COVID-19

Analysis

VAT consequences of sale and lease back during COVID-19

Deloitte Real Estate - VAT-related attention points for the seller.

Would you like to know more about the VAT consequences of sale-and-lease-back under COVID-19 circumstances? As the pandemic is affecting the liquidity of many companies, Real Estate investors can increase their liquidity position by selling their business assets and lease them back. In this article, Deloitte Real Estate will focus on the most critical VAT-related attention points for the seller.

Authors: Kevin van Lierop and Maud Verscheijden

The supply of a building is in principle exempt from VAT, unless it concerns a building site or building no later than two years after it has been taken into first use. In that case, the supply is taxed with VAT at the standard rate of 21%. In all other cases, there is in principle a VAT exempt supply, but the parties can, under certain conditions, opt for a VAT taxable supply.

VAT supply: Yes or no?

For VAT purposes, it is regarded a supply if the right to dispose of the immovable property as owner is transferred to another. The question has arisen as to whether, in a sale-and-lease-back transaction, the right to dispose of the good as the owner passes to the buyer. After all, from the moment of delivery, the buyer must rent the immovable property back to the seller.

At the beginning of 2019, the Court of Appeal of The Hague ruled in a case regarding a sale-and-lease-back transaction. A housing association has sold a virtually new complex of leased out homes and parking spaces to a third party and rented it back subsequently. After the transaction, the association continues to (sub)lease the complex to the residential users in the same way, as well as managing the complex. In addition, it has been agreed that the buyer may not proceed to the sale of the homes to a third party without the consent of the stakeholder and that consent will not be given to the buyer in the first 15 years.
The Court of Appeal ruled that under these specific circumstances the right to dispose of as owner has not passed to the buyer. There is therefore no VAT supply. However, the Court of Appeal noted that if there was a VAT-relevant transaction, this would be a VAT-exempt financial performance by the buyer to the association.

Despite the (contractual) agreements between the seller and the buyer that the immovable property could not be disposed of without the consent of the seller, the buyer is indeed able to legally transfer the property. This means that in this case in our view a supply takes place from seller to buyer. This is also the conclusion of the Advocate General in these proceedings. Currently this case is still pending at the Supreme Court.

It will probably rarely happen in practice that the transfer of legal ownership does not also lead to a supply for VAT purposes. Only in very specific situations will there be no supply of immovable property. For example, if the two elements of the sale-and-lease-back qualify as one composite transaction. In that case, according to the Court of Justice, this transaction could qualify as a (VAT-exempt) financial transaction. Especially if banks participate in sale and leaseback transactions, such a form of financing may well be the intention of the parties. However, this intention as such does not seem to us to be sufficient to qualify the supply and leaseback as one composite transaction for VAT purposes.

Transfer of a business

If an immovable property is transferred together with the current lease agreements and these are continued by the buyer, a so-called “transfer of going concern” is considered for VAT. As a result, no VAT is due on the purchase price and the buyer takes the place of the seller for VAT purposes. In our view, a sale-and-lease-back transaction should normally not qualify as a transfer of going concern for VAT purposes because the property is not transferred in leased status. Only a business asset is transferred which after the supply is leased back from the buyer.

Consequences for the right to recover VAT

Barring very exceptional cases, the sale-and-lease-back will lead to a VAT supply of the immovable property from seller to buyer.
If the supply takes place before, on or no later than two years after the immovable property is taken into first use, the supply is subject to VAT. The parties can opt for a VAT taxable supply if the buyer will mainly (at lease 90%) use the immovable property for activities that entitle the buyer to recover VAT (for example, a VAT-taxable lease back to the seller). In the case of a VAT taxable supply, the seller is allowed to recover input VAT on costs incurred in respect of the supply.

A VAT exempt supply might lead to a claw-back of initially reclaimed input VAT in relation to the construction and/or acquisition of the immovable property under the so-called VAT revision scheme. In addition, the seller is not entitled to recover input VAT on deal fees (e.g. advisory fees, legal fees) and the VAT exempt turnover might lead to a lower pro rata VAT recovery ratio for input VAT incurred on general costs.
But what about the consequences for the buyers in these transactions?

Interested in learning more?

Stay tuned for the next release of this Deloitte trilogy on www.deloitte.nl/bps, which will take the point of view for buyers and VAT in sale-and-lease-back transactions (Part 3). This final release will conclude the Deloitte trilogy on VAT consequences of sale-and-lease-back during the pandemic.
In the meantime, find our Deloitte Real Estate brochure here, to learn more about Deloitte Real Estate Services.

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