Are foundations considered buildings for VAT purposes?

An important for the property development sector and interesting from the VAT point of view ruling was issued by the CJEU on November 7^th, 2024. The case C-594/23 (Lomoco Development ApS and others) was between the Danish Ministry of Taxation and several property development companies. These companies sought to demonstrate the VAT exemption  for the supply of land equipped only with prefabricated foundations for future residential constructions. According to the companies, the foundations constituted in fact buildings within the meaning of Council Directive 2006/112/EC.

Case background

In 2006, NSS acquired the property previously used as a campsite. It subdivided the property into 16 plots, provided utility connections and began laying foundations. The work was completed before January 1^st, 2011, which is significant as under Danish law all property supplies were VAT-exempt until the end of 2010. Transitional provisions allow the exemption to continue for all buildings without exceptions, provided construction began before January 1^st, 2011. For constructions started after this date, restrictions apply, including exceptions for new buildings and building lands.

The company sought to take advantage of the VAT exemption for the sale of these 16 plots. It pointed out that the foundations were part of a building and thus fall within the definition of ‘buildings or parts thereof‘, the supply of which is exempt from VAT under Article 135(1)(j) of the VAT Directive. The company claimed that the Danish rule, which only considers a building to be a structure completed to at least a degree that allows its use, is a restriction violating the Directive.

CJEU ruling

The Court agreed that in Article 12(2) of the VAT Directive, the term ‘building’ is defined broadly and includes ‘any structure fixed to or in the ground’. However, it pointed out that this provision refers to Article 12(1)(a), which discusses “the supply, before first occupation, of a building or parts of a building “. Since the foundations cannot  be either occupied or used as intended for the building themselves, they do not meet the definition of part of a building within the meaning of the VAT Directive. Consequently, the supply of land with only foundations for residential constructions should be considered a supply of building land and, as such, subject to taxation.

The foundations therefore remain the means of attaching the structure to the ground and cannot be considered the subject of a VAT-exempt transaction under Article 135(1)(j) of the VAT Directive.

Consequences for Polish taxpayers

The CJEU ruling is yet another reminder that the interpretation of tax regulations cannot be reduced to a literal reading of the content of the provisions, ignoring the purpose of the norm and its location in the entire system. Particularly in the property development sector, where investment processes are lengthy and transaction amounts are substantial, analyzing the legal status of a property is essential before concluding a transaction. A potential mistake could lead to additional costs related to overdue VAT and interest in the event of an audit. Incorrect taxation of property supply transactions instead of exemption results in a arrears for civil law transaction tax on the purchaser’s side.

The CJEU’s decision aligns with the Polish courts’ jurisprudence. A similar position was presented by the Supreme Administrative Court (NSA) in the ruling of May 18^th, 2017, ref. I FSK 1691/15, where the court stated that ‘only such buildings, structures, or parts thereof that are suitable for ‘use’ after construction or improvement are covered by Article 43(1)(10a) of the VAT Act, which excludes objects that only have poured footings and reinforced concrete foundation walls with partially completed utility connections.’   This approach is also upheld in recent rulings, such as the June 27^th, 2023 decision by the Provincial Administrative Court (WSA) in Poznań, where the court ruled that objects with only concrete foundations, insulation, and reinforcement are excluded from the scope of Article 43(1)(10) and (10a) of the VAT Act.

Thus, the discussed CJEU ruling does not revolutionize the principles applied in Poland but rather confirms an already established practice.