8 May 2026
VAT deduction denied for school renovation due to abuse of law
A municipality in the Netherlands incurred VAT in relation to the renovation of a school building in the Netherlands. The school building is owned by a foundation that is responsible for providing education for students residing in that same municipality and which is not eligible for VAT recovery.
After a tender procedure, the foundation awarded a construction company the bid to carry out the renovations to the building for the sum of EUR6,832,093 (inclusive of VAT). Subsequently, the foundation obtained approval from the municipality for a grant of approximately EUR3 million to finance the renovations.
Based on advice obtained from a third-party tax advisor, the municipality concluded a contract with the foundation whereby the municipality is responsible for managing the renovations to obtain a tax benefit. The municipality fully deducted the VAT incurred on the renovation costs and recharged an amount of EUR 4,319,609 to the foundation. This resulted in a VAT benefit of approximately EUR400,000 (21% of the EUR 2 million difference between the total contract sum and the fee charged by the municipality to the foundation).
The Dutch tax authorities denied the VAT deducted by the municipality claiming that that the entire arrangement – whereby the municipality acted as intermediary - constitutes abuse of law. The Dutch lower court confirmed that this arrangement was primarily designed to obtain a VAT benefit, as the foundation had no/limited right to VAT deduction whereas the municipality was eligible for full VAT recovery. Furthermore, the court found that the arrangement was artificial and lacked economic or commercial justification. The municipality could not clearly show any objective evidence that the arrangement was set up for commercial or economic reasons.
Key takeaway / recommendation
This judgement shows that arrangements where businesses (with a limited VAT deduction right) act as intermediary and re-charge costs incurred on goods or services to another party may be scrutinised by the Dutch tax authorities. It is important that an intermediary can demonstrate clear economic and commercial reasons for intervening in a supply.
