COMVIISSION OF THE EUROPEAN COMVTUNITIES 
C0M(93) 563 final 
Brussels, 11 November 1993 
-•«si» 
JSWBPP REQUEST BY THE DUTCH GOVERNMENT FOR AUTHORIZATION TO 
INTRODUCE IN CONNECTION WITH THE LETTING OF IMMOVABLE PROPERTY 
A MEASURE DEROGATING FROM THE SIXTH VAT DIRECTIVE (77/388/EEC) 
AND BASED ON ARTICLE 27(1) AND (2) 
OF THAT DIRECTIVE 
(Communication from the Commission to the Council) 
I 
REQUEST BY THE DUTCH GOVERNMENT FOR AUTHORIZATION TO 
INTRODUCE IN CONNECTION WITH THE LETTING OF IMMOVABLE PROPERTY 
A MEASURE DEROGATING FROM THE SIXTH VAT DIRECTIVE (77/388/EEC) 
AND BASED ON ARTICLE 27(1) AND (2) 
OF THAT DIRECTIVE 
(Communication from the Commission to the Council) 
1. Introduction 
(a) In accordance with Council Directive 77/388/EEC, Member States are required to 
apply the common system of value added tax. Under Article 27(1) of that 
Directive, the Council may authorize any Member State to introduce special 
measures for derogation from the Directive, in order to simplify the procedure for 
charging the tax or to prevent certain types of tax evasion or avoidance. 
(b) In a letter from the Office of the Dutch Permanent Representative received by the 
Secretariat-General on 13 August, the Commission was informed of a measure 
aimed at preventing certain types of evasion in connection with the taxable 
letting of immovable property. The letter, together with a description of the 
measure, is contained in Annex I. 
(c) In a letter from the Secretariat-General of the Commission dated 13 September, 
the other Member States were informed, in accordance with Article 27(3) of the 
above Directive, of the measure proposed by the Dutch Government. Under 
paragraph 4 of the same Article, the Commission or any Member State may 
request that the matter be raised by the Council. 
2. Description of the measure 
The Dutch Government is proposing to introduce the following arrangements into its 
legislation: 
(a) the extension to 20 years of the adjustment period for the deduction of VAT in 
the case of immovable property, which is set at 10 years by Article 20(2) of the 
Sixth Directive; 
(b) the introduction of a minimum taxable amount for taxable immovable property; 
(c) the introduction of a minimum taxable amount for the establishment of rights in 
rem in respect of immovable property. 
The Dutch authorities justify these arrangements by the need to combat the 
undesirable application of the option arrangement for the taxable letting of 
immovable property. 
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3. Opinion of the Commission 
The Commission considers that a special measure may not be authorized under 
Article 27 of the Sixth Directive unless that measure, while derogating from the 
detailed rules of application of the common system of value added tax, respects the 
basic principles and key provisions of this system. In the view of the Commission, 
the measure proposed by the Dutch Government does not meet these conditions. 
The arrangements at points 2(b) and (c) for introducing minimum taxable amounts 
constitute too absolute a derogation from what is a key provision of the common 
system of value added tax, namely Article 11 of the Directive. The arrangement at 
point 2(a) imposes more onerous obligations on taxable persons in terms of keeping 
commercial documents and is a disproportionate measure since it is intended to 
apply to all immovable capital goods, regardless of their use, in order to capture 
possible cases of avoidance in relation to the letting of immovable property. In 
addition, the Commission is of the opinion that the objective of preventing tax 
avoidance has already been taken into account by Article 20(2) of the Directive, 
which allows Member States to opt for an adjustment period of 10 years, instead of 
five years, in the case of immovable property. 
4. Conclusion 
Since the arrangements in question give rise to fundamental objections, the 
Commission requests that the matter be raised by the Council, in accordance with 
Article 27(4) of the abovementioned Directive. 
Annex 
TRANSLATION OF LETTER AN -
From: Office of the Dutch Permanent Representative 
Dated: 6 August 1993 
To: EC Commission 
Subject: Notification of planned Dutch measures derogating from the Sixth 
VAT Directive 
In accordance with Article 27(2) of the Sixth Council Directive (77/388/EEC) 
of 17 May 1977 on the harmonization of the laws of the Member States 
relating to turnover taxes (OJ No L 145 of 13 June 1977), the Dutch 
Government hereby informs the Commission, with a view to obtaining the 
necessary authorization from the Council, that it is intending to take three 
measures derogating from the Directive. The aim is to prevent undesirable 
application of the option arrangement for the taxable letting of immovable 
property. 
The proposed measures are explained in greater detail in the annex to this 
letter. 
(Complimentary close) 
pp. The Permanent Representative 
(signed) 
E.A. Bosch 
Financial Adviser 
O CC. Ministry of Finance 
AttnrDGFZ 
Ministry of foreign affairs 
Attri: Mr.J.H.M van BonzeI 
Annex 
Explanatory note on measures to be taken by the Netherlands pursuant to 
Article 27 of the Sixth VAT Directive 
In the Netherlands the letting of immovable property is, in principle, 
exempt from turnover tax. However, the lessor and the lessee may refrain 
from applying the exemption by opting for taxation (option arrangement for 
taxable letting). In introducing the right of option, the Netherlands has 
exercised the power provided for in Article 13(C)(a) of the Sixth Directive. 
Introduction of the right of option in 1968 served two purposes: prevention 
of any cumulation of taxation in the sector concerned, and prevention of 
possible distortions of competition between traders buying immovable 
property and traders renting immovable property. The option arrangement 
was, therefore, confined to lessees who were traders for turnover tax 
purposes. Public-law bodies, in so far as they did not rank as traders, 
were not eligible for the arrangement, although exempt traders were. 
In practice, however, it was felt that the right to opt for taxation should 
also be available in respect of the letting of immovable property to persons 
other than traders. This covered in particular the letting of office 
buildings and similar premises to public and semi-public bodies as well as 
to other institutions not ranking as traders for turnover tax purposes. 
Especially in cases where a building was let on a tax-exempt basis for only 
a few years, the lessor was disadvantaged in that he could no longer deduct 
input tax in the course of the adjustment period even if he subsequently let 
the building on a taxable basis. As a result, the lessor tended to pass on 
the entire amount of input tax in the rental for the short rental period. 
In this connection, the Netherlands, when bringing turnover tax legislation 
into line with the Sixth Directive in 1978, extended the right to opt for 
taxation to all lettings of immovable property. An exemption was made for 
residential property since such property was in the private sector. 
Accordingly, there is no right of option in the case of residential 
property. 
When the legislation was amended in 1978, the adjustment period for the 
deduction of input tax was also increased to ten years. 
In a number of cases, the right of option has been exercised in undesirable 
ways. Non-traders, including in particular public bodies, and exempt 
traders sometimes exercise this right in order to avoid taxation as regards 
investments in immovable property. Instead of purchasing immovable property 
such as an office building straight away, thereby giving rise to 
non-deductible taxation of the investment, the purchase is deferred for 
ten years, i.e. the length of the adjustment period for the deduction. In 
the meantime, the building is rented, with the right of option being 
exercised for the taxable letting. During the rental period, the lessor 
qualifies for a direct, full deduction of tax on his investment and is 
liable to tax only in respect of the regular rental payments. After 
ten years, the rental relationship is ended by handing over the movable 
property to the lessee. Such handing-over is exempt from tax and does not 
result in any adjustment of the tax on the investment deducted by the lessor 
in the past. This is because the adjustment period has expired. 
Compared with direct purchase, deferred purchase under a rental arrangement 
produces a tax saving of some 50% on the investment costs. This saving is 
based on the charging of a rental that covers costs. There is a larger tax 
saving if a rental is charged that is too low in relation to the investment 
costs. 
In practice, the rental arrangement described above is encountered in the 
case of related and non-related parties alike. 
The Dutch Government takes the view that use of the option arrangement for 
no other purpose than to avoid tax is undesirable. It considers, therefore, 
T* 
that action must be taken to combat this practice. Since this cannot be 
done under existing legislation, it intends to take the following measures: 
1. The adjustment period for the deduction of input tax in the case of 
immovable capital goods will be extended from 10 to 20 years; 
2. Where the letting of immovable property is taxed, the taxable amount 
will be based at least on a value that bears some relationship to the cost 
price of the immovable property; 
3. In the event of the taxable establishment of a limited right in respect 
of immovable property other than residential accommodation, the taxable 
amount will be based at least on a value that bears some relationship to the 
cost price of the immovable property. 
Further details of these measures are given below: 
Measure 1: This is the most important measure. It is clearly needed since 
the VAT advantage conferred by the arrangement at issue is brought about 
mainly by the adjustment period for immovable capital goods, which is 
relatively short compared with the economic life of such goods. An 
adjustment period of 20 years more closely reflects the economic life of an 
immovable capital good. What is more, a longer adjustment period will serve 
one of the basic principles of turnover tax, viz. the most effective linkage 
possible between the deduction of input tax and the actual use of the good. 
An extension of the adjustment period means that the parties will have to 
let and rent immovable property on a taxable basis for a longer period 
before the lessee is able to acquire ownership of it on a tax-exempt basis 
without the lessor adjusting the deduction. Moreover, where the property is 
supplied before expiry of the adjustment period, the amount that the lessor 
has to pay back to the tax authorities in connection with the adjustment of 
his tax deductions will be higher the longer the adjustment period. 
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The extension of the adjustment period will not be confined to cases in 
which an immovable capital good is let on a taxable basis with exercise of 
the right of option. It will apply to all immovable capital goods, 
regardless of their use. This will ensure that the parties do not resort to 
new arrangements for immovable capital goods that have the same effect from 
a commercial angle as the option arrangement for taxable letting but that, 
from a legal angle, do not rank as the letting and rental of such goods. 
Such new arrangements include the establishment of restricted rights (of 
short duration) such as usufruct, leasehold or right of building in respect 
of immovable property, with such establishment being followed after expiry 
of the adjustment period by an exempt supply of the mere ownership of the 
property that does not give rise to adjustment of input-tax deductions; 
Measure 2 : As regards taxable letting of immovable property, tax will be 
calculated on the basis of a value that, given the cost price of the 
property, equates to the open-market value in cases where the parties, for 
whatever reason, agree on a lower rental. In such cases, the taxable amount 
is not the (subjective) rental agreed by the parties. This measure will 
ensure that the effect of measure 1 is not negated by manipulation of the 
rental, it always being possible for the parties to agree on a lower rental. 
The reduction in the amount of rental paid during the rental period will be 
offset by a higher, albeit tax-exempt purchase price at the end of that 
period. In this connection, the parties are even free to agree on a rental 
that does not cover costs. As can be deduced from the ruling of the Court 
of Justice of 21 September 1988 in Case 50/87 [ECR] 4797, agreement on a 
rental that does not prevent application of the right to deduct input tax, 
which is inherent in the exercise of the right of option. 
This measure is not confined to lessees unable to deduct tax or able to 
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deduct tax only in part. Such a restriction would give rise to major 
practical problems. It is difficult to make taxation dependent on the use 
made by the lessee of the property since the lessor as the taxable person 
cannot often ascertain what the lessee intends to do with the good. The tax 
is still, of course, deductible provided that the immovable property is used 
for taxable transactions; 
Measure 3: As regards taxable establishment of a restricted right in respect 
of immovable property, tax will be calculated on the basis of a value that, 
given the cost price of the property, equates to the open-market value in 
cases where the parties, for whatever reason, agree on a lower 
consideration. In such cases, the taxable amount is not the (subjective) 
value of the consideration agreed by the parties. This measure is similar 
to measure 2 and applies to parties wishing to sidestep the new option 
arrangement for taxable letting by resorting to the establishment of 
restricted rights in respect of immovable property. Residential property 
can be excluded from this measure since the option arrangement for taxable 
letting is not available for this category of immovable property. 
The measures planned by the Dutch Government represent derogations from the 
last subparagraph of Article 20(2) of the Sixth Directive, which provides 
for an adjustment period of not more than 10 years in the case of immovable 
capital goods, and from Article 11(A)(1)(a) of that Directive, which 
provides for a taxable amount based on the value of the consideration for 
the taxable transaction. Accordingly, the Dutch Government is seeking for 
these measures the authorization referred to in Article 27(1) of the Sixth 
Directive. 
The Dutch Government has, of course, considered alternatives to the above 
measures. One was to restrict or defer the right of the lessor to deduct 
input tax. It was discarded as constituting an undue infringement of the 
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basic principles of the turnover tax system, which is based on direct, full 
deduction of input tax. The other alternative was to restrict the right of 
option to lessees that used the rented immovable property for taxable 
transactions. Exempt traders and non-traders would then be excluded from the 
arrangement. That alternative was, however, at variance with the background 
to the present and, in the view of the Dutch Government, soundly based scope 
of the option arrangement and would lead to major practical problems for 
lessees who used the immovable property both for transactions conferring a 
right to deduct input tax and for transactions for which no such right 
existed. More generally, the objection to both alternatives was that the 
solution to the problem of the undesirable use of the option arrangement for 
taxable letting did not tackle the actual cause of the problem, viz. the 
relatively short adjustment period for the deduction in relation to the 
economic life of immovable property. 
Lastly, the Dutch Government would point out that the option arrangement in 
its country generally operates in a satisfactory manner. Problems do, 
however, arise in cases where the right of option is used as a means of 
avoiding tax. The measures which the Dutch Government intends to take will 
resolve many of the problems associated with the option arrangement without 
affecting the characteristics and basic principles of the arrangement. 
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ISSN 0254-1475 
COM (93) 563 final 
DOCUMENTS 
EN 09 
Catalogue number : CB-CO-93-599-EN-C 
ISBN 92-77-61134-0 
Office for Official Publications of the European Communities 
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