Whilst Denmark is implementing new VAT rules on the change of intention as to the use of real estate, the European Court of Justice has recently ruled on the Stichting case, which has affected the Danish implementation.
The main issue is how recovered input VAT should be adjusted in situations where the property is solely used for VAT exempt purposes. Depending on the circumstances, the change of use is either considered a new transaction or, if not, the recovered input VAT must be corrected.
New rules in Denmark as of 1 July 2021 – from a 10-year adjustment of recovered input VAT to an instant 20% output VAT liability of the current market value
In December 2019, the Danish Parliament passed a bill concerning change of intention as to the use of real estate.
In summary, in cases in which capital goods have been constructed or acquired for VAT-taxable purposes and later used for 100% VAT-exempted purposes, the rules have changed from an input VAT adjustment over a 10-year period to an instant output VAT liability amounting to 20% of the market value. This would have great economic consequences in an uncertain market.
Thus, the change of use of capital goods is considered a new transaction, i.e. taken out of the business and is therefore treated as a sale at the time of the change.
The Stichting case affects the implementation of Danish VAT law – change of intention in the first financial year is decisive.
In the meantime, the European Court of Justice (“ECJ”) has ruled on a similar issue, in the Stichting Schoonzicht case C-791/18 (“Stichting”), which is affecting the implementation of Danish rules. The Danish Tax Agency has recently issued a guidance on altered use.
The Stichting case concerns the way in which an initial deduction of input VAT should be adjusted by a trader who constructed an apartment complex, which was intended to be used for VAT-taxable purposes. However, some of the apartments were subsequently rented out, with the result that the first use of those apartments was VAT exempt.
The decisive point is whether the change of intention takes place before or after the first financial year in which the construction of the property is completed.
If the change of intention takes place before the end of the financial year in which the construction of the property is completed, the taxable person is liable to repay the excess VAT which was deducted in full, if the initial deduction exceeded the amount which the taxable person was entitled to deduct. In other words, a correction of recovered input VAT must be made.
Correlation between the new Danish rules and the Stichting case
The Danish Tax Agency has not clarified the correlation between the new Danish rules and the Stichting case. However, we assume it would be as follows:
- When the change of intention takes place before the end of the financial year in which the construction of the property is completed, the taxable person must correct recovered input VAT.
- When the change of usage takes place after the end of the financial year in which the construction of the property is completed, the change is considered a new transaction. Consequently, an instant output VAT liability amounting to 20% of the market value must be settled.
We are following the development closely and recommend that businesses carefully consider their options and consequences hereof if they might change intention as to the use of real estate.
