The Administrative Court of Appeal has determined in a decision that the Swedish VAT rules on tax adjustment as regards real estate investments, whereby a real estate owner can be liable to pay previously owner’s deducted VAT, is in conflict with EU law. The decision implies that deduction of input VAT arising in conjunction with a real estate owner undertaking an investment in real estate should not be added back and paid when the real estate is sold on to a real estate owner at a later stage who uses the same real estate in VAT exempt operations.
The premises in the Court’s decision were, amongst other things, the following: that a limited liability company acquired real estate (non-packaged) which incurred a voluntary VAT liability, whereby the previous owner had deducted VAT on investments in the real estate. The limited liability company subsequently sold the real estate to a private individual whereby the voluntary tax liability ceased to be in effect. According to the rules in the VAT Act, the onward sale of real estate and termination of the voluntary tax liability imply an obligation on behalf of the seller to, on a net basis, pay the previous owner’s deducted VAT on the real estate investment. The limited liability company was of the opinion that, in spite of the wording of the Swedish VAT Act, EU law prevents the Tax Agency from applying the tax adjustment rules in this case. The limited liability company invoked the EU Court’s decision C-622/11 Pactor Vastgoed and the EU Court’s statement that the obligation of the tax adjustment cannot be assigned to any other real estate owner than the real estate owner making the deduction. The Tax Agency did not object to this principle, in itself, but believed that the limited liability company’s acquisition of the real estate comprised a sale of operations, implying that the limited liability company assumed the previous owner’s position (fiscally speaking). The previous owner’s deduction of VAT was, therefore, seen to have been made by the limited liability company, according to the Tax Agency. With this view, the Tax Agency meant that the obligation for the limited liability company to pay the previous owner’s deducted VAT is not in conflict with EU law.
The Administrative Court of Appeal rejected the Tax Agency’s objection and determined that the EU Court’s statement as to who is to assume the responsibility for the tax adjustments is so unambiguous and generally designed that there is no significance if it is a question of a transfer of operations or a straightforward real estate acquisition. The limited liability company (as the new owner of the real estate) could not, therefore, be obliged to pay the previous owner’s deducted VAT in spite of the VAT liable operations in the real estate being terminated.
According to our opinion, the outcome of the Court’s decision is not surprising as practice in the EU Court makes it clear that the Swedish VAT rules regarding for responsibility for tax adjustments as regards deduction of input VAT on real estate investments made by previous owners is in conflict with the EU VAT Directive. As the outcome of the decision, in practice, implies a retained right of deduction of input VAT on real estate investments, where the use of the property changes from VAT liable to VAT exempt operations, we assume that the Tax Agency will appeal the decision to the Supreme Administrative Court.