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What constitutes an “essentially new construction,” under Dutch law still lacks a clear definition, but positive steps were made recently in a Dutch Supreme Court preliminary ruling, when the court found that the precise criteria for determining this must be decided on a case-by-case basis.

On November 4, 2022, the Dutch Supreme Court answered preliminary questions from the Zeeland-West Brabant District Court on how to interpret the term “essentially new construction” (wezen nieuwbouw). According to the Supreme Court, only changes in the building’s construction could lead to an “essentially new construction, which, for example, has a different tax treatment.

Facts and circumstances

This case involved the acquisition of a hotel building that the seller had converted from an office building before delivering it to the buyer.
To convert the building into a hotel, the office building interior was gutted, with major renovations made to the plumbing. The building was also equipped with new sprinkler and heating systems. No changes were made to the building’s existing base construction—the roof, floors, stairs, ceilings and elevators were neither removed nor or replaced. The façade remained unchanged as well. The interested party argued that the conversion from an office to a hotel resulted in an essentially new building; therefore the acquisition of the hotel building should be exempt from real estate transfer tax (RETT) since delivery was subject to VAT.

Ruling

The district court had found that the basic criteria for defining “essentially new construction” remained to be defined, and for that reason it referred questions to the Dutch Supreme Court for a preliminary ruling. The Supreme Court found that an “essentially new construction” must involve changes to the “building construction,” which involves the replacement (of part) of the existing building construction. According to its decision, generally speaking, most renovations will not be extensive enough to result in it creating an “essentially new construction.”
When determining whether a building renovation is extensive enough to be considered an “essentially new construction,” i.e. that from an architectural point of view, a renovation has been so radical that essentially a new building was created, these factors should be considered, among others:

• Architectural identity, external recognizability,
• Changes in function in the sense of possible uses,
• The size of the investments made, and the added value realized through renovation.

However, these are never decisive or necessary.

Practical consequences

With its ruling, the Dutch Supreme Court once again makes it clear that facts predominate when assessing whether or not a renovation can be considered an essentially new construction. The focus seems to be on the building construction. To what extent can an adjustment to the building construction be viewed as a sufficiently radical renovation for creation of an essentially new construction? This remains a factual test. For example, would the installation of a mezzanine along with elevators be sufficiently radical? Apart from this determination, other factors should only serve as an indication. Whether this qualification is an advantage or disadvantage will depend on the intended use of this immovable property.

While this decision should be welcomed step forward when looking for guidance on the concept of “essentially new construction,” it is only a baby step, as determining this key term will still have to be assessed on a case-by-case basis. Room for discussion therefore remains.