Background
As a main rule, the lease of whole buildings and specific premises in a building is VAT exempt in Sweden. However, when leasing the premises to a tenant for use in the tenant’s business subject to VAT, the landlord may opt to charge VAT on the lease.
By opting to charge VAT on the lease, the landlord is entitled to recover input VAT on costs for the letting; for example, VAT on capital expenses and operating expenses for the building. If there is no optional VAT liability, the landlord may not recover input VAT on its costs. The landlord must then compensate for its costs of the non-recoverable VAT via a higher price of the lease. For tenants conducting business subject to VAT, this undisclosed VAT will thus be an indirect cost that otherwise could have been recovered via input VAT claims.
The Swedish system with optional VAT liability aims to eliminate the negative effects of non-recoverable input VAT.
To be able to opt for VAT, certain criteria must be met. For instance, the premises leased must be continuously used in a business subject to VAT. In the Swedish Tax Agency’s view, the continuous use requirement means that only one tenant can use the premises under the lease period. If more than one tenant were to use the premises in question, optional VAT liability would be rejected.
This has led to great uncertainty and restraints in, for example, group internal leases, where two or more group entities share the office space.
The Tax Agency’s view has also hindered landlords from agreeing to more flexible and resource-efficient forms of lease agreements, because the cost of the non-recoverable input VAT has been too high.
The case in the Supreme Administrative Court
A company had erected a new building and claimed input VAT recovery on the costs. The building was to be rented out for joint use by three parties. Neither of the parties could afford, or had the need, to use the newly erected building on its own when they jointly agreed to lease the building.
The lease was structured in such a way that the company owning the building leased it out under a 10-year lease agreement with optional VAT liability to one of the parties, which, in turn, entered into 10-year lease agreements with the other two parties, also under optional VAT liability. All three parties also entered into an agreement covering the details of the parties’ joint use of the building, and how the costs for the building leased should be distributed between the parties.
Following an inquiry into the company owning the building, the Tax Agency rejected the input VAT claimed by the owner. The Tax Agency claimed that the criteria for optional VAT liability were not met. The reason given was that the building was used by more than one tenant, which meant that the building could not be deemed to be continuously used in a business subject to VAT.
With the representation of the author, the client appealed the Tax Agency’s decision through the Swedish administrative court system all the way up to the Supreme Administrative Court.
The company argued that the requirement for continuous use did not hinder more than one tenant, all conducting business subject to VAT, from jointly using the premises.
The Supreme Administrative Court’s conclusion
In its conclusion, the Supreme Administrative Court agreed with the company’s argument that the premises should be considered used continuously in a business subject to VAT even though more than one tenant jointly used the premises. Therefore, the criteria for optional VAT liability were met.
KPMG’s comment
The ruling is much appreciated and will have positive effects for leases, especially for more modern uses of premises, such as office sharing and other joint lease agreements.
Also, there has previously been great uncertainty and risk involved in the VAT treatment for leases where two or more group entities jointly use office space. This uncertainty and risk can now be resolved.
