Today, many municipalities are choosing to sell all or parts of their real estate holdings due to political or operational economic reasons. The sales can be to either entirely independent companies or to municipality owned companies. Regardless of the purchaser, questions regarding VAT arise and these need to be investigated prior to a decision on a sale being undertaken. The possibilities to receive a refund of input VAT in the ongoing operations can, for example, change with a sale of real estate. This can also imply that the municipality is to repay so-called investment VAT to the municipality account.
In certain cases, the VAT consequences of a sale can impact the price of the real estate and it is, therefore, important that the municipality review the VAT consequences which can arise and the measures needed to be taken prior to a decision on a sale.
Compensation or deduction of input VAT on operating costs
A municipality has the right to receive compensation from the so-called municipality account system for VAT which the municipality cannot deduct according to the Act on VAT. This implies that the municipality has the right to receive a refund of VAT regardless if it is VAT liable or VAT exempt operations being undertaken in the property; however, this does not apply if it is a question of residences in the building. Still, a company only has the right of deduction for input VAT on costs if the company undertakes VAT liable operations in the property.
As long as the municipality owns the real estate, the municipality receives compensation or deduction for all input VAT on costs for the real estate. When the real estate is sold to a company, the company must operate VAT liable activities in the property in order that VAT deduction applies. If the company undertakes VAT exempt operations, its possibility of incurring the right of VAT deduction is limited. This also applies if it is a municipal company who has acquired the property.
Consequently, there is a difference in terms of VAT treatment depending on whether the owner of the property is a municipality or a company. As a limited right of deduction implies costs in the form of non-deductible VAT, it is important to investigate and consider these factors prior to a municipality selling a property. Examples of properties where these questions are particularly relevant are schools, nursing and care homes, sports facilities and cultural facilities. However, VAT consequences must always be considered in real estate sales.
Still, there is a certain possibility to avoid VAT costs. A real estate owner can be voluntarily tax liable for the renting out of premises, which implies that the real estate owner charges VAT (25 percent) on the rental amount and, at the same time, receives the right of deduction of input VAT on the costs arising for the property. Voluntary tax liability presumes, however, that the rental tenant has an exclusive right to the property or the premise and that it is used permanently in VAT liable operations.
Should, on the other hand, the premises be rented to a municipality, then, the voluntary tax liability implies, regardless of whether the municipality as rental tenant undertakes VAT liable or VAT exempt operations, for example, educational activities, social care or similar, in the premises. However, the municipality may not further rent out the premises to a VAT exempt rental tenant. If the intention is that the municipality is to, after a sale, rent back the premises, there should be an investigation prior to such sale to ensure that the requirements for the new real estate owner to apply the rules on voluntary tax liability for its renting to the municipality can be met. In such a manner, input VAT on the real estate costs can be deducted and no direct VAT costs arise for which the real estate owner must be compensated.
In conjunction with a municipality deciding to sell real estate, previous investments must also be investigated. This applies to new and additional constructions or reconstructions where the VAT on the project has amounted to at least SEK 100,000. If the municipality has received compensation for investment VAT from the municipality account, the sale can imply that portions of the investment VAT must be refunded to the municipality account. The new property owner can have the right to receive a refund of VAT through the general VAT system but must, then, wait for the funds during a number of years, in spite of the municipality having made an immediate refund of the entire amount. It is important that the parties are clear on this point prior to a sale.
VAT and real estate are complicated issues and this becomes even more complex in the municipal sphere where VAT must be handled in two parallel systems. PwC has a number of tax advisors who are specialised in these issues. If you would like more information, you are most welcome to contact us.