The Swedish government has proposed to allocate SEK 5 billion in order to reduce rental costs for companies in sectors hard-hit due to the current pandemic. The legal basis for the support has been enacted but is it possible to predict whether support will be granted? We answer some common questions.
The regulation for rent relief for tenants has been enacted by the government after permission from the European Commission. It regulates the allocation of the SEK 5 billion given by the government. The purpose is to support tenants in hard-hit sectors as a result of the Covid-19 virus.
What is required to receive a discount on rental costs?
The fundamental conditions are:
- There must be a rental agreement where the rent is completely or partially determined to a fixed amount signed by 1 March 2020.
- The tenant must have rented the premises during the period 1 April 2020 to 30 June 2020.
An agreement regarding a discount on fixed rent must be signed between the tenant and the landlord by 30 June 2020. The agreed rent should be lower than the fixed rent that would have been paid during the same period and otherwise on unchanged terms. The support can be applied for by the landlord from 1 July 2020 to 31 August 2020.
The size of the discount
The support will cover up to a maximum of 50 percent of the discount on the fixed rent during the specified period. The support cannot exceed 25 percent of the fixed base rent. Furthermore, the total amount of support for one specific tenant is not allowed to exceed EUR 800,000. When the size of the discount for rental costs is assessed, consideration is to be given to support received by other landlords related to the same tenant.
Which sectors are covered by the discount for rental costs?
In order for the landlord to be able to apply for support, the tenant must be active in specific hard-hit sectors according to SNI-codes (Swedish Standard Industrial Classification), level 3- or 5-.
These are some of the included sectors:
- Retail business
- Restaurants and organisation of conventions and trade shows
- Consumer services such as activities of dentists, physiotherapists, hairdressing and other beauty treatments
The application is processed by a County Administrative Board and it is the County Administrative Board of Västra Götaland that has the coordinating responsibility.
How effective is the measure to support the real estate industry?
A fundamental condition in order to get support is that there must be a reduction of fixed rents. Adjustments in agreed turnover rents or renegotiation of a fixed rent to a temporary turnover rent is not covered by the support.
The decision to support property owners during the pandemic is welcome, but it remains to be seen how effective the measure is. It can be noted that the decision by the government to set aside funds started speculations about how the support would be distributed as well as who had the right to seek support. From that perspective, it would have been beneficial if the guidelines were introduced earlier. The support is currently limited to the second quarter of 2020. However, the industry is already asking for support for the subsequent quarter. A potential problem might be the fact that a particular landlord will not know if aid is actually granted until later this summer since it is not possible to apply for aid before 1 July. It is also very difficult to anticipate the size of the discount for rental costs in a particular case since consideration is to be given to support received by other landlords related to the same tenant.
Income tax consequences
A reduction of the rent that is not commercially motivated may be disregarded from an income tax point of view. Thus, the landlord may still be taxed as if the entire rent was received. If the landlord chooses to credit an already charged rent, this could be considered as a composition. A loss due to a composition is tax deductible for the landlord provided that the composition is commercially motivated. Assuming that the tenant is insolvent a composition is tax exempt but will reduce the amount of tax losses that can be carried forward.
An issue that is being raised is whether a landlord, who receives support from the state, may be required to report VAT even on the amounts received in support. The Swedish Tax Agency has clarified that the support constitutes a so-called benefit directly connected to the price, which means that the landlord must include the support when calculating the basis for VAT relating to the rent. This applies on the condition that the premises, to which the support relates, are subject to voluntary tax liability for VAT.
A landlord who receives support due to the temporary discount for rental costs must charge the tenant the full amount of VAT on the discounted rent, as well as the VAT on the amount corresponding to the support from the state. This applies in general regardless of the fact that the support is received at a later date. The tenant will thus pay VAT calculated on the total rent (after the landlord’s discount) despite the rent being partially paid by the state.
The Swedish Tax Agency has also commented on how a potential loss of customers should be handled by the landlord. In case of a confirmed bad debt loss then 20 percent of the unpaid claims shall be considered as VAT. This applies even though the VAT that was initially charged to the tenant constituted a larger proportion of the total amount as it also included state support. The Swedish Tax Agency considers that the contribution is considered to include VAT. Unlike other bad debt losses, the tax base may not be reduced to zero, but must be reduced by any amount corresponding to 80 percent of the loss of customers. According to our interpretation, this is because the landlord has actually received a certain amount of support from the state.
To sum up, the landlord’s handling of VAT becomes complex when the rent is reduced. The landlord should take into account how the support should be handled from a VAT perspective already at the stage when entering an agreement with the tenant. In addition, it is important that the invoice to the tenant for the rent to which the support relates is properly formulated so that the tenant receives a satisfactory basis for deduction for input VAT.
Contact our hotline
At PwC we want to help companies through these times of insecurities. We have set up a free hotline where you can call and get answers to your questions related to the government's support measures and other Covid-19 related business issues.
Katarina Menzel och Henrik Gustafsson arbetar på PwC:s kontor i Stockholm och är särskilt inriktade på frågor som berör fastighetsbranschen. Henrik är momsexpert med särskild inriktning på momsfrågor som berör fastighetsområdet men har bred erfarenhet av momsfrågor inom alla branscher. Katarinas huvudfokus är inkomstskatterättsliga frågor i fastighets- och byggbranschen men även frågor gällande fastighetsskatt och stämpelskatt. Katarina: