VAT risk for hotels used for refugee housing

In previous position statements, the Swedish Tax Agency has described its view of VAT liability in the context of the renting out of rooms in hotel operations. During 2017, this approach on behalf of the Agency will impact many of the companies who have rented out their hotel facilities for refugee housing.

The Tax Agency’s position stipulates two requirements in terms of VAT liability with the renting out of rooms.

1. The renting is to refer to the provision of temporary lodgings.
2. The renting is to take place within the framework of the hotel operations.

In assessing whether the renting comprises temporary lodging, it is the length of the rental period to the rental tenant (for example, to Migrationsverket (the Swedish Migration Agency)) which is decisive in the assessment and not the period of time spent by the individuals concerned in the premises.

In order for operations to be classified as hotel operations, the landlord (entity renting out the premises) is to have marketed their apartments at daily or weekly rates. In addition, there should be a reception area and the landlord should provide other hotel services, such as changes in bed linen, cleaning or other services for the guests.

If someone who undertakes VAT liable room rental in hotel operations rents out a room to one and the same contractual party for more than 11 months during a 12 month period, the Tax Agency interprets this to mean that a permanent change in the focus of the operations has taken place from VAT liable hotel operations to VAT exempt property rental.

Comments

During 2016, a company who has operated room rental in a hotel operation, and the renting out has taken place with the same contractual party during the last 12 month period, risks no longer being seen to undertake VAT liable hotel operations. As the length of the rental agreement determines if it is a question of VAT liable rental, it is of no importance that there are a number of different individuals who have stayed in the rented out rooms. Neither does it have any significance if the contract with the rental guest is, for example, extended by three months at a time. It is the combined rental period to one and the same rental guest during a 12 month period which is to be considered, according to the Tax Agency.

Consequently, those renting out to Migrationsverket, or a sub-supplier to Migrationsverket, during all of 2016, will be seen to undertake VAT exempt property rental if the renting out continues during 2017.

As seen from the above, the transfer from a VAT liable hotel operation to a VAT exempt property rental increases the cost for the landlord as the right of deduction of input VAT on the costs referring to the rental operations does not apply. For example, this can refer to input VAT for costs for electricity, water and heating.

In addition, if the landlord during the last 10 year period has undertaken new construction or reconstruction of the property and the VAT as amounted, during one year, to at least SEK 100,000, then, the landlord also risks being required to net/refund portions of the input VAT which they previously deducted. The assessment of whether the landlord is to net VAT is based on the circumstances applying at the end of the financial year in question.

We recommend that those of you who have rented out refugee housing in your hotel operations, charging VAT, to Migrationsverket, or in similar situations, study the Tax Agency’s position in this context and how it could impact your operations.

You are welcome to contact PwC’s tax advisors if you require assistance in this matter.