Value added tax and letting in Sweden - Akelius University

Value added tax and
letting in Sweden
Louise Söderberg, 2011-03-30
Summary
Value added tax is a form of consumption tax being paid to the
government. Letting out properties, apartments exempt, is
normally not subject to value added tax. There is a law
regarding voluntary value added tax liability that can be
applicable. An investigation was made, investigating whether or
not letting out properties should have mandatory value added tax
or not.
Introduction
What is value added tax?
Value added tax is a form of consumption tax.
As a buyer, it is the tax on the purchase price. As a seller it is the
tax only on the value added to a product, material or service.
The difference between the tax on the purchase price and the tax
on the material is being paid to the government by the
manufacturer, which makes them a sort of a tax collector to the
government. This means that the tax is not a cost to the
manufacturer; it is the end consumer in the chain who will be
charged the tax as a cost.
The value added tax is regulated by the law
Mervärdesskattelagen (1994:200) ML.
There are four criteria to be fulfilled by a company for it to be
liable for value added tax:
Taxable
Turnover
Domestic
In professional business
The value added tax on letting in Sweden is currently 25 percent
of the taxable amount.
Value added tax and letting
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Value added tax regarding letting -
existing rules
Property letting is normally not liable to value added tax unless
it concerns parking lots, commercial signs, storage boxes, ports,
airports, agricultural tenancy or rooms in a hotel business.
Therefore, the property owner who is letting out commercial
units can not make a tax reduction regarding value added tax on
their costs concerning those units.
However, the voluntary value added tax liability for letting out
commercial units can be applicable.
This is all regulated by the law Mervärdesskattelagen,
(1994:200) ML, 3, 8 and 9 chapters. The regulations regarding
voluntary value added tax was introduced in 1979.
Voluntary value added tax liability
The voluntary value added tax liability is valid earliest from the
day the application reaches the tax authorities – Skatteverket. If
the contract between the landlord and the tenant starts later, that
becomes the date the value added tax liability is valid from.
Voluntary value added tax liability can be applied if all of the
following criteria are fulfilled:
A rental agreement exist which states that the rent is liable
to value added tax.
The let unit is a property according to ML.
That the tenant continuously runs a business, that is liable
to value added tax, at the unit that is being let.
A decision regarding voluntary value added tax liability
from the Skatteverket, Swedish tax authorities, is required.
The tenant may be the state Sweden, the municipality or the
county council, even though their business is not liable to value
added tax.
For example, if the tenant is the municipality and the business
they are running is a school, which normally is not liable to
value added tax.
In this case, the property owner is able to apply for voluntary
value added tax liability. On the other hand if the tenant was a
private owned school, the property owner would not be able
apply for voluntary value added tax liability.
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Examples of businesses in Sweden that are not liable to value
added tax worth mentioning are:
Banks
Insurance companies
Doctors unless arranged by county council
Dentists unless arranged by the county council
Private day care centres
Private public buildings for elderly
Schools arranged by private institutes
Some education businesses
Foundations
Non profit associations
The application to voluntary value added tax
liability
The information on the application to the tax authorities –
Skatteverket - consists of:
The name, address and organization number of the
applicant.
Stated if the applicant is a property owner or
condominium owner or a first hand contract holder or a
second hand contract holder “Sub-letting”.
The real state name, municipality and county where the
real estate is situated.
The property owner and their organization number.
The date the property was purchased.
The name of the tenants, their address and organization
number.
State if the property is under progress.
The date the tax obligation starts from.
The date the contract is valid from.
The area that shall be included in the voluntary value
added tax liable.
The area that previous was approved as voluntary value
added tax liability.
The area for other units in the property that is not being
applicable to voluntary value added tax liability such as
apartments and commercial units.
The total rentable area in the property.
Who can apply for voluntary value added tax liability?
The property owner.
The first hand contract holder.
The sub-letting contract holder.
The condominium owner.
The bankrupt’s estate.
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The process of applying for voluntary value added tax liability is
an on-going process.
As soon as a rental agreement change to be a contract liable to
value added tax, this needs to be approved by the tax authorities.
The decision received from them gives the property owner the
opportunity of charging the tenant value added tax. The property
owner will now be able to deduct value added tax on those
invoices that belongs to the unit.
The voluntary value added tax liability can change due to
change in the use of the unit. For example if a tenant whose
business is liable to value added tax moves out of the unit and
the next tenant moving in is not liable to value added tax or the
other way around.
A vacant unit can be registered to voluntary value added tax
liability. If a tenant who is liable to value added tax moves out,
and the unit becomes vacant, the unit can remain registered to
voluntary value added tax liability until a tenant moves in who is
not liable to value added tax.
You are obliged to report changes that affect the voluntary value
added tax liability to the tax authorities – Skatteverket, failure to
do so may result in high penalties.
The decision being issued by the tax authorities – Skatteverket
consists of how many square meters that are liable to voluntary
value added tax liability in relation to the property’s total
rentable area.
The owner of a property can obtain voluntary value added tax
liability during the construction stage. This gives the owner their
money back on your value added tax during the construction
time, which is good for the company’s liquidity. Voluntary
value added tax liability can not be combined with the
retroactive deduction of value added tax or adjusting of the
value added tax.
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Cessation of the voluntary value added tax
liability
The voluntary value added tax liability can cease due to changes
in the usage of the unit, for example a unit liable to value added
tax is being converted into an apartment.
Other reasons for the voluntary value added tax liability to cease
are, due to fire or demolition of the property.
The voluntary value added tax liability can also cease due to
transfer of a property, when you as a property owner sell the
property ceases the voluntary value added tax liability at the
withdrawal. The new owner will automatically be registered for
voluntary value added tax liability. The seller and the buyer send
an application to the tax authorities – Skatteverket. The buyer
inherits the rights and obligations that come with the voluntary
value added tax liability.
Retroactive deduction
In general, the deduction can not start earlier than the date the
company apply for voluntary value added tax liability but there
is an exception; retroactive deduction.
It is possible to make a retroactive deduction on value added tax
on new construction, extension, conversion of a building.
As an owner you need to be voluntary value added tax liable
within three years after the calendar year that the construction
was completed.
Correct the value added tax by adjusting
Adjusting the deducted value added tax should be made in
proportion to the use of the property.
The adjustment time is ten years.
Adjustment on properties is only done if the value added tax is
higher than 100,000 Swedish kronor.
For example, if you as the owner made an investment, in a unit
that is registered for voluntary value added tax liability, of
1,000,000 Swedish kronor in year 2005. You made a deduction
of the value added tax for the whole ten year period of 200,000
Swedish kronor that first year. In year 2010, your tenant moved
out and you rented out the unit to a tenant that was not liable to
value added tax. This means that you now need to make an
adjustment regarding those 200,000 Swedish kronor that you
have deducted. You need to reduce it to (200,000 /10 years)*5
years = 100,000 Swedish kronor since the business now being
performed in the unit no longer is liable to value added tax.
Conversely, you as an owner can be granted a deduction on an
investment been made up to ten years earlier in a unit that at that
time was not was not registered for voluntary value added tax
liability.
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Advantages with voluntary value added tax
liability
One advantage is that the property owner can deduct the value
added tax on those invoices that directly belongs to the unit that
is registered for voluntary value added tax liability.
Another advantage is that the property owner can make a
standard deduction of the property’s invoices that concern the
whole property, for instance maintenance of the roof or the outer
walls.
The standard deduction in Swedish is called - schablonmoms,
this value added tax is allocated on the units’ surface area in
Akelius Fastigheter AB. For instance if a building consist of
1000 square meters total rentable area. The building consists of
500 square meters apartments, and 500 square meters
commercial areas which are registered for voluntary value added
tax liability.
This gives us 500/1000 = 50 % standard deduction value added
tax regarding cost that concerns the whole building.
If a property reaches over a 95 percent standard deduction this
will be rounded up to a 100 percent standard deduction.
A third advantage is that the investments made in the unit are
also deductable to value added tax.
The process of handling a new commercial
tenant, liable to value added tax at Akelius
The city manager investigates whether or not the new tenant is
liable to value added tax. This can be done by looking at the
tenants registered certificate or by contacting the controller who
can look it up on the net.
The city manager proceeds with the signing of contract with the
tenant. The contract needs to be signed as liable to value added
tax.
The city manager sends a copy of the contract along with an
appendix filled out, stating the most interesting information
regarding the unit being rented out, see the picture below.
The controller checks if the unit already is registered for
voluntary value added tax liability or not.
If not - an application is sent to the tax authorities applying for
the unit to become registered to voluntary value added tax
liability. As soon as we receive a decision from the tax
authorities we are allowed to charge value added tax on the rent
to the tenant and deduct value added tax on those invoices
belonging to the unit and use the standard deduction on the
property on costs concerning the all tenants.
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Property number internal
Property name
Company name - owner of the property
Organisation number
Klient internal number
Asset manager/City manager
Tenant
Appendix sent along with a copy of the contract to the controller
Organisation number
Business
Take over date of the contract
Squaremeters according to the contract
Objects / Contractsnumber
Last tenant
The unit was earlier vacant Yes _____________ / No _______________
The unit is already liable to VAT Yes _____________ / No _______________
Should the unit be liable to VAT Yes _____________ / No _______________
Have their been changes in
squaremeters since the previous
tenant Yes _____________ / No _______________
Changes in squaremeters + -
Reason for the above change
Have the unit been split into
several contracts and squaremeters Yes _____________ / No _______________
If YES state the new contractnumber
and squaremeters
Appendix for the internal value added tax administration,
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Value added tax regarding letting -
coming rules
There is an investigation carried out by the Swedish Finance
department from 2009 regarding voluntary value added tax
liability. The investigation looked into whether or not all
surfaces being let out in a property should be compulsory liable
to value added tax. The investigation includes easements and
leases. Renting out apartments should be exempt from the
compulsory liable value added tax. The possibility to secede
from the compulsory liable value added tax should not exist.
It was the Fastighetsägarna Sverige, an association for Swedish
property owners, the Svenskt Näringsliv, Swedish business
sector, and Stockholm’s Chamber of Commerce which
requested a legislative change regarding properties voluntary
value added tax liability.
The main reason for the suggested legislative change is due to
high administration costs regarding the compliance with today’s
law for the property owner and the tax authorities. Different
changes in the letting out process leads to applications being
sent to the tax authorities.
To start a voluntary value added tax liability – the company
sends in an application to the tax authorities.
If another unit is being added on as a voluntary value added tax
liability a new application is sent to the tax authorities.
If the value added tax liability ends, an application needs to be
sent to the tax authorities.
If the property is being sold, the value added tax liability will
automatically transfer to the new owner. Both the seller and the
buyer need to send in an application to the tax authorities.
A common problem is that the property owners charge value
added tax to their tenants even though they have no decision
from the tax authorities. This leads to large value added tax risks
for the tenants and the landlords.
The above organisations first suggestion is that there should be a
compulsory liability to value added tax for letting out to
business traders that uses the property other than for housing.
The second suggestion is that the voluntary value added tax
liability should remain but with an easier administration without
applications and decisions.
There are different ways of managing voluntary value added tax
liability in the European Union today.
For instance, Spain, Poland and Latvia have compulsory value
added tax liability except on apartments.
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The investigation was started by the Finance department in
December 2008, and the investigation was finished in October
2009. After this, the investigation was sent on referral to
different stakeholders.
The next step is for the Swedish Government to send a proposal
to the Swedish Parliament. The proposal will be voted on and a
final decision will be made.
The Parliament must receive the proposal no later than mid
March 2011 to be able to process it before the summer.
This is highly unlikely and therefore no decision will probably
be made with an effect earlier than 2011-12-31 regarding the
voluntary value added tax liability.
Transitions rules
The investigation suggests that there will be a five year period of
transitional rules.
This means that new contracts during this period that are agreed
on will be liable to compulsory value added tax.
Those contracts that run when the new law is enforced and not
registered for voluntary value added tax liability will be able to
stay so during the five years.
Those landlords who engage short term tenure can keep those
contracts not liable to value added tax for a period of two years
after the new legislation introduced. If the contracts change to be
liable to value added tax within two years from the legislation
was introduced, the tenure will stay as compulsory liable to
value added tax.
One time adjustment on investments will be possible.
Effects on the new proposal
Those businesses that today are exempt from compulsory value
added tax, for instance banks, insurance companies and non
profit associations. Those tenants will have a higher cost with a
compulsory value added tax liability on all surfaces except
apartments.
Non profit associations are extra vulnerable, their income is
dependent on people and also municipality contribution. It will
not be a politically correct move to impair the non profit
associations.
There is a proposal that non profitable associations shall be
excluded in the new law.
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For the property owner is this proposal positive.
It will be less administration for the property owner.
Those properties with not only apartments in them will receive a
positive effect on the standard deduction that can be made for
the entire property.
It will be possible to deduct for the value added tax regarding all
costs on the units except apartments.
A one time adjustment will be possible on investments in units
made ten years before the law is enforced, that did not use to fall
under voluntary value added tax liability.
References
Moms för fastighetsägare; 4: reviderade upplagan; Jan Kleerup,
Christian Merseburg
Mervärdesskatt för den ideella sektorn Ds 2009:58;
Regeringskansliet, Finansdepartementet
Skatteverket SKV 563 utgåva 3; Frivillig skattskyldighet för
moms vid uthyrning av lokaler
Skatteverket SKV 553 utgåva 21; Handelning för
mervärdesskatt
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