Are VAT and capital transfer tax ready for a circular economy?

M. Albers naast M.M.W.D. Merkx

High environmental pressure, degradation and depletion of natural capital, loss of biodiversity, resource depletion and climate change. All reasons for the Netherlands to aim for a fully circular economy by 2050, thus aligning with EU targets. The construction sector is one of the five sectors designated by the EU and the Netherlands to achieve circularity. As the construction sector accounts for half of total material use in the Netherlands. In turn, the production business of building materials is responsible for a large share of global greenhouse gas emissions. In the article ‘De cirkel is rond: bouwen aan circulariteit in de bouwsector’, Madeleine Merkx, Professor of Indirect Taxes at Erasmus School of Law, and Martijn Albers, Assistant Professor of Tax Law at Erasmus School of Law, discuss the VAT and capital transfer tax implications of circular construction within the existing legal framework. In the article, they highlight the current law and present proposals to adapt it.

Changes to have the construction sector move towards a circular economy have implications for both VAT and capital transfer tax. This led to the main research question: What implications does circular construction have for VAT and capital transfer tax within the existing legal framework and on which points is an adjustment of this legal framework desirable? 

Circular construction

Circularity assumes that our waste is used as raw material for new products. As such, circular construction encompasses a wide range of practices, including minimising material use, maximising reuse, and designing buildings for disassembly and reuse. This approach requires rethinking traditional construction practices and standards, which in turn poses challenges for taxation. In circular construction, we see three main forms: remountable buildings, modular buildings and flex housing. 

Remountable building entails that a building is disassembled after use and then reassembled somewhere else. In doing so, it is possible for parts of the building to be remounted and form a building or to be remounted together with other parts. The researchers use the example of a temporary court that is completely remountable. After years of use, the building is dismantled and then reassembled in another city.  

Modular construction involves independent units that can be joined or stacked, like a temporary school building that can be expanded or reduced depending on pupil numbers. This raises questions about VAT status, independence of the units, the impact of relocation and review periods.

Flex housing includes temporary housing such as prefabricated houses for students or status holders, which are easily movable, stackable or splittable. This involves similar issues to those of remountable and modular construction, with an additional focus on housing flexibility.


For all these forms of circular constructions, questions on VAT arise, including the definition of immovable property and buildings, independence of immovable property, manufacturing and first occupation, and review periods. The article first discusses whether circular buildings are real estate for VAT purposes. It also explains how immovable property should be considered separately if it is not connected or legally/physically distinct and can be used separately, as in the case of apartment rights. The article also highlights t hat in the case of modular construction, whether something is considered an independent immovable property depends on the factual circumstances.

The article then discusses manufacturing and first occupation of immovable property. It discusses the criteria for manufacturing, which involves major conversions that essentially create a new building. The article indicates that Member States are obliged to tax the supply following a conversion according to the VAT Directive. It also addresses the definition of first occupation, stating that moving an existing building is not necessarily considered a first occupation unless the building returns to the productive sphere. This may occur, for example, after a major refurbishment.

Finally, capital transfer tax is discussed. There, Merkx and Albers discus the implications for capital transfer tax levied on circular buildings. This is because this tax applies upon acquisition of immovable property and rights to which it is subjected. This tax differs substantially from VAT. For instance, the researchers argue that immovable property is more likely to be involved in this tax than in VAT, due to the alignment of the concept with civil law. 

Towards a circular interpretation

The researchers conclude that the current VAT and capital transfer tax legal framework is largely applicable to circular buildings practices, such as remountable construction, modular construction and flex housing. It is suggested that the concept of ‘real estate’ should be interpreted more broadly from the point of view of neutrality, with a building's destination and function playing a greater role than its degree of disassembly and movability. Moreover, the researchers recommend that a capital transfer tax exemption should be provided to avoid unwanted foreseeable situations.

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Click here to read the entire article (provided in Dutch only).

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