New definition of “real estate” within the EU could result in changes in the Swedish VAT Act

A new definition of “real estate” will be introduced within the VAT area next year. The new rules have their basis in an EU Regulation (Nr. 1042/2013). The Swedish Ministry of Finance has, therefore, recently proposed changes in the Swedish VAT Act, which, amongst other things, could affect VAT liability in the context of the leasing and sale of real estate, and can also impact reverse taxation within the construction sector and the regulations regarding the VAT adjustments on investments.

These changes are proposed to come into effect on 1 January 2017.

According to the proposal, the term ”real estate” is to be defined as comprising the following:

• Each determined portion of land, on or under its surface, which is possible to own or occupy.
• Each building or construction which has been attached to or is in the land, above or under sea level, and which can neither be disassembled or moved easily.
• Each object which has been installed and which is included as an integrated part of a building or construction and without which such building or construction is incomplete, for example, doors, windows, ceilings, stairs and elevators.
• Each object, equipment or machine which is permanently installed in a building or construction and which cannot be moved without the building or construction being destroyed or changed.

The current VAT regulations are related to the Code of Land Laws and the civil law definition of real estate. In the VAT Act there is also the term “business accessories” which includes other machinery, equipment or special interiors other than industrial accessories and which have been attached to or installed within the building. In terms of VAT business accessories are real estate. The leasing and sale of business accessories are, however, VAT liable in contrast with the leasing and sale of usual real estate. Furthermore, the VAT adjustment rules for machinery and equipment apply to business accessories.

The memorandum proposes that the term “business accessories” be entirely eliminated. Instead, a new term is proposed, “permanently installed machinery and equipment”. This is to comprise real estate but in terms of VAT adjustment is seen to comprise chattels.

The proposal also implies the elimination of the special rules in the VAT Act stipulating that the provision of electricity, gas, water, and heating services comprising a stage in the sale of real estate is exempt from VAT.

Comments

The new definition implies major changes as the current definition of real estate in the VAT Act is based on civil law in contrast with the proposed definition. The proposed changes will, therefore, most likely have consequences in a number of areas. Amongst other things, there will be consequences as regards the VAT liability in the sale and transfer of real estate, reverse taxation within the construction sector, rules on the netting of investment VAT and as regards the regulations on country of turnover.

As the term operating fixtures and fittings is to be eliminated and replaced by the term “permanently installed machinery and equipment “, the question arises, amongst others, of how the term is to be interpreted in relation to the definition of real estate stated above. It would appear that the defining line in many contexts is not entirely obvious as the assessment includes questions such as the degree to which the machinery/equipment is integrated into the building’s normal functions and how difficult it is to move the machinery/equipment in question. The question of interpretation is important as it results in consequences as to what is to be seen to be VAT liable, respective VAT-exempt, and as regards the VAT adjustment rules to be applied regarding the machinery/equipment. According to our assessment, the machinery and equipment, which is permanently installed will, to a greater degree, be VAT liable after the change in the law compared with the current regulations. We also believe that many questions will arise regarding VAT adjustment, particularly during a transition period.

When it comes to the rules on reverse taxation within the construction sector, the work referring to industrial accessories is not included because industrial accessories are, today, not seen to comprise real estate according to the VAT Act. According to the proposal, permanently installed machinery and equipment, alternatively that which cannot be easily moved, will comprise real estate – regardless of its purpose or use. This implies, amongst other things, that reversed construction VAT can arise even if the work is executed on machinery and equipment used in industrial operations.

According to the regulations regarding fiscal domicile within the EU, such services are usually seen to be executed in the country in which the real estate regarding which the services are provided is located. This implies that VAT is to be reported in the country in which the real estate is located. With a change in the definition of real estate, a company executing work on real estate in other EU countries, for example, in the installation of machinery and equipment, should review their practices to ensure a correct handling of VAT when the definition of real estate is changed in the EU country in which the work in question is being undertaken.

The proposal has been sent for consultation and the changes in the law can be impacted by the consulting bodies’ views.