Sale-and-lease-back transaction has far-reaching VAT implications
Sale-and-lease-back transactions have taken off in the Dutch logistics real estate sector (especially distribution centres). The enormous increase in online sales has led to a greater need for distribution centres. There also seems to be growing interest from the UK. Adapting to the post-Brexit reality, British companies are looking to lease distribution centres and other logistics properties in the Netherlands.
A sale-and-lease-back transaction tends to occur if a company has developed a logistics location for itself entirely in accordance with its own needs and wishes. The newly realised distribution centre is then sold and leased back to itself. A triple-net long-term lease is the form often chosen, giving the lessee a high degree of independence. The sale-and-lease-back transaction frees up capital locked up in bricks and mortar.
Much is involved in effecting a sale-and-lease-back transaction. The VAT consequences of such a transaction is one issue that arises. A recent judgment of the Supreme Court of the Netherlands shows that this is not a simple matter, so it is advisable to carefully design the transaction with this in mind. This sale-and-lease-back case did not concern logistics real estate, but a housing corporation that had transferred a newly built complex to a third party because it wanted to gain financial leeway. The housing corporation was subsequently confronted with a substantial supplemental assessment of turnover tax (VAT). The Supreme Court upheld the tax department’s assessment in a recent case (HR 29 January 2021, ECLI:NL:HR:2021:154).
VAT consequenses sale-and-lease-back
The following factors play a role in determining the VAT consequences of a sale-and-lease-back transaction in the Netherlands.
- The sale of new premises (not older than two years) is subject to VAT.
- That VAT does not necessarily increase the cost price for the buyer.
- However, the VAT will increase the price if the purchaser is unable to deduct that VAT. This would be the case if the property was rented out, for example.
- In certain circumstances, it may be possible to do something about this by making use of a certain tax facility, i.e. the exemption applicable if all of the business assets are transferred (i.e. “the totality of the assets” or algemeenheid van goederen in Dutch). However, care is needed here because the tax authorities do take action against the abuse of this facility.
- The company should ensure that the transaction has been optimally designed and that all bottlenecks have been identified.
- The transfer of leased premises may also constitute part of the transfer of all assets, but this recent Supreme Court ruling has shown that the facility ordinarily applicable to the transfer of all assets does not apply if the transferor of those assets carries out a different economic activity than the transferee of those assets.
- If necessary, a company should consult the tax authorities in advance.
In the Netherlands, a housing association is an organisation that builds, manages and rents out affordable social housing. In this case, a housing association owned a large apartment complex with residences, parking and commercial space. It had been renting out a large part of the apartment complex since its completion in 2011. Later in 2011, the housing association entered into a sale-and-lease-back agreement with a buyer. Under that agreement, the housing association was to sell the apartment complex to that buyer, subsequently rent it back from the buyer for a period of 25 years and continue managing it. In September 2011, ownership was transferred to the buyer.
The housing association took the position that no VAT was payable on the transfer because the sale entailed the “totality of assets” as referred to in article 37d of the Turnover Tax Act 1968. However, the tax authorities disagreed and issued a supplemental assessment of VAT. The housing association appealed unsuccessfully. According to the Hague Court of Appeal, there had been no “delivery” (levering) within the meaning of VAT because none of the actions taken by the housing association with regard to the apartment complex resulted in the buyer acquiring the power to dispose of the complex as its owner.
Supreme Court decision
The Supreme Court ruled that there had indeed been a “delivery” (levering) within the meaning of the Turnover Tax Act but dismissed the appeal on the grounds that the “totality of the assets” had indeed not been sold. For a detailed explanation (in Dutch) of the VAT system, I refer to my earlier blog. According to the Supreme Court, the concept of the “delivery” of property in the Dutch Turnover Tax Act does not refer to the civil-law concept of transfer of ownership, but to a transfer of tangible property by one party such that the other party is empowered to actually dispose of this property as its owner. The power to dispose of property as its owner implies, amongst other things, that it is possible for the party to whom that power is transferred to make decisions that may affect the legal status of the property in question, including the decision to sell the property. Whether such a transfer occurs is to be determined on a case-by-case basis on the basis of the actual circumstances.
In this case, the housing association and the buyer agreed that the apartment complex would be transferred to the buyer by notarial deed without a right or option to repurchase. From the moment of delivery, the income from the apartment complex was to accrue to the buyer. The buyer was to bear the risks associated with ownership of the apartment complex. They also agreed that the buyer would lease the apartment complex to the housing association and that the housing association would henceforth sublet the apartment complex to those to whom it had previously renting it. The buyer would be able to sell the apartment complex during the 25-year lease period only with the written consent of the housing association. The housing would not grant such consent during the first 15 years after the transfer. Given these facts, the Supreme Court ruled that there had been a “delivery” (levering) of the apartment complex within the meaning of the Dutch Turnover Tax Act. According to the Supreme Court, this was the case despite the temporary restriction on the buyer's power to sell the apartments to a third party.
“Totality of the assets”?
Because this was a VAT-taxable delivery in principle, the question that arose then was whether the housing association and the buyer could avail themselves of a VAT facility intended for use on the transfer of an entire enterprise (i.e. the transfer of "the totality of the assets"). If that was the case, the transfer would not be VAT-taxable. The concept of “the totality of the assets” may include leased property. If this facility is applicable, the acquirer assumes the VAT position of the seller or, alternatively, the transferor. According to the Supreme Court, there is a transfer of all or part of “the totality of assets” on the transfer of a business (or autonomous business unit) with tangible, and possibly intangible property, that together form an enterprise (or part of an enterprise) with which an autonomous economic activity can be carried out.
A finding that the transfer of the apartment building was a transfer of the “totality of the assets” is justifiable only if the housing association transferred all or part of its enterprise to the buyer and all or that part of that enterprise was continued by the buyer. According to the Supreme Court, just because the apartment complex remained (or remains) subject to commercial exploitation in the sense of being rented out to the users of apartments that are an autonomous part of the enterprise is insufficient on its own to justify the finding.
After acquiring ownership of the apartment complex, the buyer leased all the apartments back to the housing association for a period of 25 years and thereby granted the housing association permission to rent out (and to continue renting out) those apartments as residential units, parking spaces and business premises in its own name and for its own account. Thus, according to the Supreme Court, after the civil-law transfer of the apartment complex to the buyer, the housing association was no longer operating those apartments in the capacity of owner/landlord but rather in the capacity of tenant/sub-tenant of the apartment complex. After delivery, the housing association continued to manage the apartment complex, but did so for the buyer in exchange for payment. According to the Supreme Court, in transferring the apartment complex to the buyer, the housing association had not transferred its rent-collecting economic activity/enterprise. In this case, therefore, the transfer of all or part of the totality of assets had not occurred, according to the Supreme Court. The Supreme Court was apparently of the opinion that the party transferring the totality of the assets and the party acquiring those assets must engage in exactly the same economic activity. According to the Supreme Court, turnover tax was rightly levied by the tax authorities.
It is important to properly identify the tax issues involved in the sale of a new building that is to be leased back. In certain circumstances, VAT can be avoided by relying on a tax facility. The Supreme Court case discussed in this blog shows that the facility will have to be interpreted more restrictively than was previously assumed. It is advisable to carefully consider the (sometimes complex) tax consequences of a sale-and-lease-back transaction beforehand and to have a team of specialists assist with the various aspects of the transaction. This could include a prior due diligence investigation, the drafting of the purchase and (triple net) lease agreement and the supervision of the negotiations.
Our Construction and Real Estate team is ready to assist you with your sale-and-leaseback transactions and to ensure optimal handling of the tax aspects.
Please feel free to contact us if you have any questions.
(This is a translation of the previously published blog in Dutch Sale-and-lease-backtransactie heeft verstrekkende btw-gevolgen)