Indirect Tax News - October 2021

CJEU rejects Swedish rules on VAT adjustment for real estate investments

The Court of Justice of the European Union (CJEU) recently ruled on a special rule in the Swedish VAT Act, stating that the right to a deduction of input VAT is revoked and that all deducted input VAT must be repaid immediately, if the activity that gave rise to the right to deduct does not take place.

The Court ruled in C-248/20 Skellefteå Industrihus AB that the provision is not compatible with the EU VAT Directive, because it is the purpose at the time of purchase that is decisive for the right to deduction. The Court continued by stating that it was not considered contrary to the Directive that a member state has rules requiring the adjustment of input VAT.

The CJEU again expressed its view that  a right to deduct - once it has entered into force - cannot be revoked with retroactive effect.

The Swedish special provision in the VAT Act is thus not considered compatible with the EU VAT Directive, at least not to the extent that it means the entire deduction for input VAT must be repaid with retrospective force. However, the EU VAT directive does not prevent the Swedish special provision from having an adjustment obligation for the remaining years if the right to deduction of input VAT is revoked due to no VAT-liable transactions.

This judgment is not the only recent case in which the CJEU has rejected the Swedish provisions regarding VAT adjustments. In November 2020 the CJEU also stated that the Swedish provisions whereby the buyer can be obliged to repay the seller's investment VAT is not in line with the EU VAT Directive. The CJEU stated that only the person who made the original VAT deduction is obliged to adjust the deduction. National regulations may not result in a person other than the person who made the original deduction being liable for adjustment, which means that the Swedish rules are not permitted (C-787/18 Sögård Fastigheter AB).

The CJEU’s statement raises some questions. Does the Court's reasoning mean that adjustment of previously deducted investment VAT must take place when a planned activity ceases due to the fact that the intention to pursue it no longer exists? In other words, should investment VAT, if applicable, always be adjusted when the business ceases? Does a changed intention constitute such a changed use that entails requirements for (continuous) adjustment?

As a result of this decision, the Swedish legislature will likely change the Swedish adjustment rules regarding VAT adjustments on property investments, which may lead to more complicated rules and higher VAT costs. Taxable persons that have paid back investment VAT to the Swedish Tax Agency may, in specific cases, have the opportunity to get VAT paid back by invoking EU law before the Swedish VAT Act.

Given that the Swedish Supreme Administrative Court has not yet delivered its ruling, it will be interesting to follow their argumentation regarding the CJEU’s decision.

Linnéa Kalmnäs

Thony Hannell