Proposal for a COUNCIL DECISION authorizing the Netherlands to apply a measure derogating from Article 11 of the Sixth Council Directive (77/388/EEC) on the harmonization of the laws of the Member States relating to turnover taxes
Date: 1996-04-03
Institutions: European Commission
Subjects: Netherlands, VAT, basis of tax assessment, derogation from EU law, tax harmonisation

COMMISSION OF THE  EUROPEAN  COMMUNITIES 

Brussels,  03.04.1996 
COM(96)  144 final 

Proposal for a 

COUNCIL DECISION 

authorizing the Netherlands to apply a measure derogating 
from Article 11 of the Sixth Council Directive (77/388/EEC) 
on the harmonization of the laws of the Member States relating 
to turnover taxes 

(presented  by the Commission) 

EXPLANATORY  MEMORANDUM 

to 

sent 

letter 

registered 

the  Secretariat-General  of 

By 
the  Commission  on 
13 August  1993,  the  Dutch  Government,  acting  on  the  basis  of  Article 27  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  -  Common  system  of value  added  tax:  uniform 
basis  of  assessment1  ,  requested  authorization  to  apply,  in  respect  of  the  letting  of 
immovable property,  a measure derogating  from  Articles  11 and 20 of that  Directive. 

In accordance with Article 27(3) of the Directive, the other  Member  States  were  informed 
of the Netherlands' request by letter dated  13 September  1993. 

As  part  of  its  efforts  to  combat  tax  avoidance,  the  Dutch  Government  requested 
authorization  to introduce the following  arrangements into its legislation. 

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; 

the introduction  of a minimum taxable amount  for  the taxable  letting  of  immovable 
property; 

the  introduction  of  a  minimum  taxable  amount  for  the  establishment  of  limited 
rights in respect of immovable property. 

The  Commission  took  the  view  that  these  measures  would  constitute  too  absolute  a 
derogation  from  what  is  a  key  provision  of  the  common  system  of  value  added  tax, 
namely  Article  11  of  the  Sixth  Directive,  and  would  be  disproportionate  to  the  aim 
pursued. 

Since  it  had  serious  objections 
the  measures,  the  Commission,  acting  under 
Article 27(4)  of  the  Sixth  Directive,  requested  on  11 November  1993  that  the  matter  be 
raised by the Council. 

to 

The  Council  Working  Party  on  Financial  Questions  began  discussing 
Government's request  at its meeting of  13 October  1994. 

the  Dutch 

The Dutch  authorities  subsequently  indicated  that they wished to amend  their request  for a 
derogation,  retaining  only  the  request  relating  to  the  introduction  of  a  minimum  taxable 
amount  for  the  establishment  of  rights  in rem  in respect  of buildings  or  parts  thereof  and 
the land  on  which  they  stand.  In  addition,  the  measure  would  apply  only  to  cases  where 
the  party  acquiring  the  rights  in  rem  is  a  non-taxable  legal  person  or  a  taxable  person 
carrying on exempted  activities that do not entitle him to  deduct  VAT.  Private  individuals 
and  taxable  persons  carrying  on  activities  which  entitle  them  to  deduct  VAT  would  thus 
be excluded  from  the scope of the  derogation. 

OJ  No  L  145,  13.6.1977,  p . l.  Directive  as  last  amended  by  Directive  95/7/HC  (OJ  No  L  102. 
5.5.1995,  p.  18). 

It  has been  found  in practice  that  tax  devices  for  evading  payment  of  some  of the VAT 
normally due in respect  of immovable property  are being set  up, chiefly  for  the benefit  of 
non-taxable  legal  persons  or  taxable  persons  carrying  on  activities  which  do  not  entitle 
them to deduct VAT. 

The practices that the Dutch authorities wish to  combat by means of the special measure 
usually follow the pattern set out below.  A non-taxable legal person (e.g. a municipality) 
or  a taxable person  engaged  exclusively  in activities which  do  not  entitle  him to  deduct 
VAT (e.g. a school) intends to buy or build new premises.  Where this person (referred  to 
below as person  "A") carries out the operation  himself, he has to bear the full  amount  of 
the VAT due either on the purchase transaction or on the building works. 

To  avoid  this  tax  burden,  the  building  in  question  is  acquired  by  another  legal  person 
(referred  to below as person  "B").  The only economic activity of B is to  establish rights 
in rem in respect  of the immovable  property  on behalf  of A; B's  activity  entitles  him to 
deduct all the VAT due on the purchase transaction or the building works. 

Once  the  adjustment  period  for  VAT  deducted  in  respect  of  investments  in  immovable 
property  has  expired,  B  sells  the  building  freehold  to  A.  The  sale  then  qualifies  for 
exemption from VAT under Article  13(B)(g) of the Sixth Directive. 

The  tax  avoidance  therefore  takes  place  when  the  contracting  parties  agree  on  an 
abnormally  low  price  for  the  establishment  of  rights  in  rem,  which  attracts  VAT,  and 
compensation  for  this abnormally  low  price  in the form  of a  high  price  for  the  freehold 
sale of the property, which  is exempt from VAT.  This enables A, the final  purchaser,  to 
have  the  use  of  a  building  and  become  the  owner  after  a  certain  length  of  time  while 
reducing the tax burden on the property considerably. 

For the establishment  of rights in rem in respect  of buildings or parts thereof and the land 
on which they stand,  such rights being regarded  as tangible  property  in accordance with 
Article 5(3) of the Sixth Directive, the planned measure is therefore  aimed at introducing a 
minimum  taxable  amount  equal  to  the  open  market  value  of  the  rights.  However,  the 
VAT would be calculated on the basis of the minimum taxable amount only in cases where 
the administration could prove that the taxable amount determined  in accordance with the 
normal rules laid down in the Directive (i.e. on the basis of the price agreed between the 
contracting parties) is abnormally low in comparison with the price that could be obtained 
for the property in a transaction between independent parties operating at arm's length. 

But  application  of this  measure  cannot  be restricted  to  cases  in  which  rights  in rem are 
established  in respect  of new buildings or parts thereof as referred  to  in Article 4(3 )(a) of 
the  Sixth  Directive.  This  is  because,  availing  itself  of  the  possibility  open  to  it  under 
Article  13(C)(b)  of  the  Directive,  the  Netherlands  allows  taxable  persons  to  opt  for 
taxation  of the establishment  of rights in rem in respect  of buildings or  parts thereof and 
the land on which they stand other than those referred  to in Article 4(3)(a). 

The Commission takes the view that the measure planned  by the Netherlands  is indeed a 
measure  aimed  at  preventing  tax  avoidance  within  the  meaning  of  Article 27  of  the 
Directive.  It  also takes the view that,  since the  derogation  should  apply  only  in limited 
cases (where it is proven  that  the price  agreed  is abnormally  lov ),  it  is proportionate  to 
the aim pursued. 

3 

The Commission considers it appropriate for the Netherlands to be authorized to apply the 
planned special  measure given its exceptional  nature.  Nevertheless,  in order to  enable the 
measure  to  be  assessed  once  it  has  been  applied  for  a  certain  period  of  time,  the 
authorization should be granted only until 31 December  1998. 

1 

Proposal for a 

COUNCIL DECISION 

authorizing the Netherlands to apply a measure derogating 
from Article 11 of the Sixth Council Directive (77/388/EEC) 
on the harmonization of the laws of the Member States relating 
to turnover taxes 

(presented  by the Commission) 

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty establishing the European Community, 

Having  regard  to  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  -  Common 
system  of  value  added  tax:  uniform  basis  of  assessment1  ,  and  in  particular  Article  27 
thereof, 

Having regard to the proposal from the Commission, 

Whereas, pursuant to Article 27(1) of the Sixth Directive, the Council, acting unanimously 
on  a  proposal  from  the  Commission,  may  authorize  any  Member  State  to  introduce 
special measures for derogation from  that Directive, in order to simplify  the procedure  for 
charging the tax or to prevent certain types of tax evasion or avoidance, 

Whereas, by registered  letter  to  the Commission  dated  13 August  1993, the  Netherlands 
requested authorization to introduce a measure derogating from  Articles  11 and 20 of the 
Sixth Directive; 

Whereas,  in  accordance  with  Article  27(3)  of  the  Sixth  Directive,  the  other  Member 
States were informed  on 13 September  1993 of the request made by the Netherlands; 

Whereas,  since  it  had  serious  objections  to  the  Dutch  Government's  request,  the 
Commission, acting under  Article 27(4)  of the  Sixth Directive,  requested  by letter  dated 
11 November  1993 that the matter be raised by the Council; 

OJ No L  145,  13.6.1977, p.l.  Directive as last amended  by DirectX  95/7/EC  (OJ  No L 102. 
5.5.1995,  p.  18). 

Whereas the Dutch Government  subsequently amended its request,  reducing  considerably 
the scope of the special measures derogating from the common system of value added tax, 

Whereas the request  is confined  to a measure introducing a minimum taxable amount  for 
the establishment  of rights in rem in respect of buildings or parts thereof and the land on 
which they stand where the party acquiring the rights is a non-taxable legal  person  or a 
taxable person carrying on exempted activities that do not entitle him to deduct VAT; 

Whereas  under  Article 5(3)  of  the  Sixth  Directive  the  Netherlands  considers  the 
establishment of rights in rem to be a supply of goods; 

Whereas,  availing  itself of the  possibility  open  to  it  under  Article  13(C)(b)  of  the  Sixth 
Directive, the Netherlands allows taxable persons to opt for taxation  of the establishment 
of rights in rem in respect  of buildings or parts thereof and the land  on which  they stand 
other  than  those  referred  to  in  Article 4(3)(a)  of the  Directive;  whereas  the  derogation 
therefore also relates to such transactions; 

Whereas, by taking the open market value as the taxable amount  for  certain  supplies, the 
proposed  measure  derogates  from  Article 11(A)(1)(a)  of  the  Sixth  Directive,  which 
provides  that  the  taxable  amount  for  supplies  of  goods  is  to  be  everything  which 
constitutes the consideration which has been or is to be obtained by the supplier  from  the 
purchaser or a third party for  such supplies, including subsidies directly linked to the price 
of such supplies; 

Whereas the derogation is aimed at preventing the tax avoidance which takes place when 
the contracting parties agree on an abnormally low price for the establishment  of rights in 
rem, which attracts VAT, and compensation for  this price in the form  of a high price for 
the freehold sale of the property, which is exempt from VAT; 

Whereas the special measure is to apply only in cases where the administration  is able to 
prove that  the taxable  amount  determined  in accordance  with  Article  11(A)(1)(a)  of the 
Directive  is  abnormally  low;  whereas  the  administration  may  not  act  on  mere 
presumptions,  and  the  parties  concerned  must  be  allowed  to  adduce  evidence  to  the 
contrary  where  they  dispute  the  level  of  the  open  market  value  established  by  the 
administration; 

Whereas, given the limited  scope of the derogation, the special  measure  is proportionate 
to the aim pursued; 

G 

Whereas  the  authorization  is  granted  temporarily,  thereby  enabling  the  effects  of  the 
measure to be assessed once it has been applied for a certain period of time, 

Whereas the derogation in question has no adverse impact on the European Community's 
own resources accruing from value added tax, 

HAS ADOPTED THIS DECISION: 

} 

Article 1 

By way of derogation  from  Article  11(A)(1)(a) of Directive 77/388/EEC,  the  Netherlands 
is  hereby  authorized  to  take  the  open  market  value,  as  defined  in  Article  11(A)(1)(d)  of 
the  Directive,  as  the  taxable  amount  for  the  establishment  of  rights  in rem  in  respect  of 
buildings  or  parts  thereof  and  the  land  on  which  they  stand,  considered  to  be  tangible 
property in pursuance  of Article 5(3) of the Directive, where the following  two  conditions 
are met: 

the  taxable  amount  determined  in  accordance  with  Article  11(A)(1)(a)  of  the 
Directive  is  abnormally  low  in  comparison  with  the  price  that  could  be  obtained 
for  the  property  in  a  transaction  between  independent  parties  operating  at  arm's 
length; 

the  party  acquiring  the  rights  in  rem  is  a  non-taxable  legal  person  or  a  taxable 
person carrying  on exempted  activities that  do not entitle him to deduct  VAT. 

Article 2 

This authorization  is granted  until 31 December  1998. 

This Decision  is addressed  to the Netherlands. 

Article 3 

Done at Brussels, 

For the Council 
The President 

? 

ISSN 0254-1475 

COM<96) 144  final 

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