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In general, a taxable person is entitled to deduct VAT paid on goods or services insofar as those goods and services are used for their VAT taxable transactions. For the taxable person to determine the extent of deductible VAT, there must be a direct and immediate link between the purchased goods and services, and their (taxable) transactions at a later stage. In practice it can occur that certain purchased services also accrue to third parties. In a recent ruling, the Court of Justice confirms that despite benefits to third parties, a taxable person can still deduct all VAT on such costs provided that a direct and immediate link between the costs and the subsequent taxable transactions exists and that the third-party benefit is subordinated to the taxpayer’s needs. 

A Belgian project developer builds and sells apartment buildings on land owned by third parties. The undivided shares of the land corresponding to the apartments sold by the project developer are sold by the landowners themselves. The project developer pays the publicity, administration and brokerage costs relating to both the sale of land owned by third parties and the apartments built by the project developer. The project developer subsequently fully deducts the VAT from these costs. Following a tax audit, the Belgian Tax Authorities stated that the project developer cannot deduct all VAT on the publicity, administration and real estate brokerage costs but only the VAT insofar as it relates to the sale of the buildings.

Further to questions raised by the Belgian court, the Court of Justice ruled that if a taxpayer – a project developer – pays publicity, administration and real estate brokerage costs for the sale of apartments that also accrue to a third party, this does not prevent the taxpayer from deducting the VAT on these costs. This follows from the VAT Directive. There should, however, be a direct and immediate link between these expenses and the economic activity of the taxpayer. In addition, the benefit for the third party (in this case the landowners) should be secondary to the needs of the taxpayer’s business.

It is for the national court to assess and consider all circumstances as to whether the costs are directly and immediately linked to the economic activities of the project developer. One of the circumstances that the national court must consider is whether the project developer can charge part of the expenses to the landowners.