On 26 January 2023, the Ministry of Finance published a memorandum on Amended rules on VAT on the transfer of property (Fi2023/00434) which contained proposals for changes to the rules on VAT on investments. The proposal has been put forward as a result of the fact that the European Court of Justice ruled that certain provisions of the Swedish VAT Act (1994:200) were incompatible with the VAT Directive.
CURRENT REGULATIONS AND THEIR INCOMPATIBILITY WITH EU LAW
The proposal put forward relates to the regulations on the adjustment of VAT on investments in transfers of real estate. Based on the current regulations, the purchaser takes over the adjustment obligation from the seller if a property is transferred as part of a business transfer and the purchaser is liable for VAT. In the case of property transfers that do not form part of a business transfer, so-called pure property transfers, the seller must, as a starting point, carry out a final adjustment for the remaining correction period. However, if the purchaser is person who is liable for tax and a voluntary tax liability exists, the purchaser takes over the adjustment obligation unless the parties have agreed otherwise. A transfer of shares in a real-estate company (a “packaged” property) does not trigger any adjustment obligation.
Current regulations stipulate that a purchaser may be required to adjust a deduction made by a previous property owner. However, the European Court of Justice has established that the Swedish rules on taking over adjustment obligations in the case of pure property transfers are incompatible with the VAT Directive.¹ In view of this, the Ministry of Finance put forward its proposal for changes to the rules for VAT on investments.
¹ Pactor Vastgoed case C-622/11 and Sögård fastigheter AB case C-787/18.
WHAT THE PROPOSAL MEANS
As a result of the proposal, in the case of pure property transfers, the seller must make a final adjustment for the remaining VAT on the investment regardless of whether or not the purchaser intends to continue carrying out activities liable for tax in the property. In the case of transfers that take place as part of a business transfer, the adjustment obligation passes to the purchaser if it has a right to deduct. The option for the parties to agree that the purchaser will not take over the adjustment obligation in the case of such a transfer is removed. The provision that the seller, in the case of property transfers as part of a business transfer, must adjust deductions that occurred during the period in which it held the property is also removed. The proposal does not affect transfers of shares in a company that, in turn, owns a property.
IMPACT OF THE PROPOSAL IN PRACTICE
In practice, the proposal entails major consequences in the case of pure property transfers, in which the acquirer will no longer be able to be take over the adjustment obligation. Instead, the seller must carry out a final adjustment. Below is an example to illustrate the effects. A property is built in year one for SEK 100 million excluding VAT, with the VAT on the investment amounting to SEK 25 million. The property is sold the following year. The remaining correction period is nine years with remaining VAT of SEK 22.5 million remaining on the investment. At the time of the transfer, the seller must carry out a final adjustment and pay in the remaining VAT of SEK 22.5 million. A seller is likely to want to receive compensation for non-deductible VAT on the investment if the transaction with the purchaser cannot be structured so as to include the property as part of a business transfer. There is thus a clear risk of lock-in effects in the transaction market for such properties during the correction period for VAT on the investment.
For property transfers taking place as part of a business transfer, the purchaser will continue to take over the seller’s rights and obligations with regard to adjustment, provided that the purchaser has a right to deduct. However, the option of stipulating the opposite by means of an agreement as well as the provision stating that the seller must adjust deductions for changes occurring during its period of possession are removed. As a result, real estate will be treated in the same way as other investment goods that are transferred as part of a business transfer.
It is proposed that the proposal should enter into force on 1 January 2024. No retroactive application has been proposed. That means that the current regulations will apply, subject to the limitations resulting from case law since the rulings by the EU Court, to circumstances relating to the time before 1 January 2024. In other words, adjustment of VAT on investments with a correction period that is already in progress will be assessed on the basis of the current regulations even after 1 January 2024. It remains to be seen whether the proposal will be adopted in its current form.
Lindahl is following developments with great interest. If you have any questions about your business, you are very welcome to contact us.
