The rules on VAT on rental of premises have been the subject of both scrutiny and criticism. Proposals to simplify the rules and broaden the scope of their applicability have been put forward by the Swedish Tax Agency and the business community. Due to a judgment by the Supreme Administrative Court in a case concerning the interpretation of the ‘permanent use’ prerequisite in Chapter 3, section 3(3) of the VAT Act (1994:200), we once again have reason to return to the regulations. The outcome is good news for landlords who rent out premises that are occupied by multiple tenants.
Recently, the rules on so-called “VAT on rental of premises” have been the subject of criticism because the regulations were considered to be too narrow. In April 2022, the Swedish Tax Agency submitted a memorandum to the government on expanding the possibilities for VAT on rental of premises. It was suggested that the proposal should enter into force on 1 July 2023, but the Riksdag decided to reject the proposal in April 2023. Now we once again have reason to return to the rules since the Supreme Administrative Court handed down a judgment at the beginning of May in a case that concerned the interpretation of the “permanent use” prerequisite.¹
In principle, property leases are exempt from liability for VAT. However, a property owner who rents out premises can choose to be taxed for the rental through what is referred to as voluntary liability for tax in accordance with Chapter 3, section 3(2) of the VAT Act. The prerequisites for voluntary liability for tax include a requirement that a property owner must rent out premises for permanent use to a tenant that carries out activities liable for VAT or certain public operators. A property owner with voluntary liability for tax is able to deduct input VAT if the property is used for activities that are liable for VAT.
The background to the case concerned a company that owned a property on which the company had constructed a building. The company leased the property to a tenant which in turn sub-let the property to two sub-tenants. The tenant and the sub-tenants would make use of the property jointly. All tenants would carry out activities liable for tax or would be public operators. The company carried out a deduction of input VAT attributable to the construction on the property. The Swedish Tax Agency refused the deduction on the grounds that the conditions for voluntary liability for tax had not been met. The Swedish Tax Agency gave the reason that the requirement for permanent use meant that the property owner would rent out a particular space in premises on a continuous basis to a tenant occupying the space under an exclusive right and that this would also apply in the case of sub-letting and sub-sub-letting. The Administrative Court considered that the prerequisites for voluntary liability for tax had been met, whereas the Administrative Court of Appeal agreed with the Swedish Tax Agency. The judgment was appealed before the Supreme Administrative Court, which granted leave to appeal on the question of how the “permanent use” prerequisite should be interpreted.
Based on the preparatory materials, the Supreme Administrative Court found that the prerequisite is aimed at exempting situations in which the liability for tax constantly changes and that the assessment of permanent use should be based on the property owner’s intention with the rental. The circumstance that multiple tenants occupied the same space in the premises was not in itself considered to mean that the use was not permanent within the meaning of the provision. The decisive factor for the assessment was considered to be the property owner's intention with the rental.
¹ Supreme Administrative Court, 05/05/2023, case 5329-22
Conclusions
Based on the case, voluntary liability for tax cannot therefore be denied solely on the ground that multiple tenants occupy the premises. No requirement for the tenant to have a sole right to the space it occupies was established by the Supreme Court. This is good news as it opens up the possibility for property owners who rent out premises occupied by multiple tenants to claim voluntary liability for tax and thereby be able to make deductions for investment VAT for any investment goods in the property.
It remains to be seen whether the rules on VAT on rental of premises change in the future. Bearing in mind the fact that in April the Riksdag chose to reject a motion based on the Swedish Tax Agency’s proposal for a change to the rules for VAT on rental of premises, it appears that the existing rules will remain. Time will tell whether the Supreme Administrative Court’s ruling can lead to the debate being reopened.
Lindahl is monitoring developments with great interest and takes a positive view of simpler regulations more suited to their purpose. You are welcome to contact us if you have any questions about your business.
