Court ruling confirms input VAT deductibility of real estate transaction costs
The Supreme Administrative Court of Finland (SAC) has given a ruling on an important case regarding input VAT deduction of costs relating to purchase and disposal of real property and shares in limited liability housing companies, real estate companies (REC) and mutual real estate companies (MREC). The SAC’s new ruling confirms that companies operating in the real estate business environment by renting out real property with long-term agreements subject to VAT have the right to deduct the input VAT of transaction costs as general costs.
The SAC’s ruling KHO 2019:94
A Oy (the Company) carried out real estate investment business by owning real property and shares in real estate companies and was also renting these facilities to tenants. Most of the rental agreements were subject to VAT; only the rental agreements of the limited liability housing companies were not subject to VAT. A Oy’s business model was to use the real property for long-term renting and, therefore, it did not buy real property or shares in order to sell them.
According to a preliminary ruling by the Finnish Tax Administration (FTA), A Oy had the right to deduct the input VAT of costs relating to purchases of real property and shares in real estate companies. In addition, A Oy had the right to deduct input VAT relating to unrealized sales.
According to the SAC, the input VAT of costs relating to realized sales were also deductible as general costs. The SAC held that in case of restructuring of the corporate group, where A Oy disposed of individual real property or shares in a real estate company, and the rental activity of the property in question ceased, the sales constituted a direct, permanent and necessary extension of the taxable rental activity and thus they were in the scope of the Value Added Tax Act.
The ruling also emphasized that A Oy did not use the sale proceeds for businesses other than the real estate business, and thus the costs were not incorporated in the price of the real property or the shares sold. Therefore, the costs did not have a direct and immediate link to the sale of a particular real property or shares but were, as such, components of the price of the goods or services, which the Company supplied and hence they were deductible as the Company´s general costs.
Key VAT takeaways from the ruling
Prior to the ruling, there has been uncertainty in Finland about the deductibility of input VAT relating to real estate investment companies that purchase and dispose of real property and shares in real estate companies and use them for long-term renting subject to VAT. The FTA has previously held in similar situations that no input VAT on the disposal costs are deductible.
The SAC’s new ruling confirms that companies operating in a real estate business environment by renting real property with long-term agreements subject to VAT have the right to deduct the input VAT as general costs. Therefore, it might be important to review past property structures to see if there are deductions that have not been utilized. We are happy to tell you more about the case and to assist in recovering any unclaimed input VAT deduction for the years 2016 – 2019.