Next year, a new definition of real property will be introduced into the VAT Act. The background is an EU regulation to ensure uniform application within the EU. According to the government, the new definition of real property should not entail any major change in substance, although not everyone agrees.
Common property concept within the EU
To ensure that the rules are applied uniformly within the EU, there are implementing provisions for the directive in what is known as the implementing regulation. The implementing regulation is binding and directly applicable in all Member States.
There is no definition of the term immovable property in the VAT Directive. In order to achieve a uniform application of the concept of immovable property within the EU, a definition has been introduced in the Implementing Regulation. The amendment to the regulation will enter into force on 1 January 2017.
EU legal definition of immovable property.
According to the Implementing Regulation, immovable property is defined in the following four sentences (Article 13b):
a) Any determined part of the earth, on or under its surface, which it is possible to own or possess.
b) Any building or structure which has been fixed to or into the ground, above or below sea level, and which cannot be easily dismantled or moved.
c) Any item that has been installed and forms an integral part of a building or construction, without which the building or construction would be incomplete, for example doors, windows, roofs, staircases and lifts.
d) Any item of property, equipment or machinery that is permanently installed in a building or structure and cannot be removed without destroying or altering the building or structure.
Fastighet
The definition of real property in the Value Added Tax Act (1994:200), ML, is based on and partly linked to the civil law definition of real property according to the Land Code. However, in relation to the Land Code's definition of real property, the VAT definition of real property involves both expansions and limitations.
For example, building fixtures are always considered real estate for VAT purposes, even if they are owned by someone other than the owner of the building or land. However, industrial fixtures are not included. Business fixtures are covered by the concept of real estate but are treated in certain respects as movable property, for example, VAT is payable on the transfer and lease of business fixtures.
The concepts of building fixtures, business fixtures and industrial fixtures do not have any immediate equivalent in EU law.
Reference to the new definition in the Swedish VAT Act.
For a more functional definition, the civil law connection to the Land Code will disappear in the ML. Instead, a reference to the implementing regulation's definition will be introduced. This is intended to clarify that it is an EU law concept and not a national legal rule.
What does the new property definition mean?
In the government's assessment, the new concept of real property should not lead to any significant change in substance. In exceptional cases, certain items that are currently real property may no longer be so, and vice versa. This could mean that what is currently considered an industrial accessory will be deemed real property, while what is currently considered a building or business accessory will no longer be real property.
How easy is it to move or dismantle the building?
In point B above, it is stated that if a building or structure is real estate, it must be ”fixed to or in the ground” and cannot be ”easily dismantled or moved”. The government believes that the focus for determining whether something is real estate lies with the latter, meaning that for the building/structure to be considered real estate, it must be difficult to move/dismantle.
Items that are an integral part are property
The items covered by point c above are those that would normally be expected to be included in a building or construction of the type in question. Items listed include doors, windows, and roofs. Further examples given in the Commission's explanatory notes are insulation, electrical and sanitary installations, heating and cooling installations, smoke extraction in a factory, security systems in a prison, and turbine blades on a wind turbine. The decisive factor is whether the item has been installed and forms an integral part of a building or construction, and whether the building or construction is incomplete without the item.
Some examples that are currently covered by the concept of property but will not be are keys, civil defence equipment, certain firefighting equipment, shop shelving, interlayer blinds and satellite dishes.
Permanently installed items needed for the building
Minor alterations are not considered destruction or alteration under point d. If an item has been attached to a wall with nails or screws, leaving marks or traces that can be easily concealed, these alterations are considered minor.
However, the removal of wall-mounted cupboards or permanently fitted fixtures in kitchens or bathrooms in residential flats may be a change that is not insignificant, depending on how they have been fitted.
In which building will it be decided
With the new definition, the same item can be part of the property in a residential building but not in a building that is a storage facility. The question is whether the building is incomplete without the item in question, and whether the item can be moved without the building being destroyed or altered according to points c and d above.
This may also affect the rules on reverse charge for the construction sector. The rules on reverse charge shall only be applied if what is installed becomes part of the property. Depending on which building an installation is carried out in, the same work may be subject to reverse charge or not.
Other changes
”Operating permits” are replaced in ML with the expression ”machinery and equipment” that has been permanently installed. The meaning is judged to be the same where the assignment or transfer of these is subject to VAT as today. However, the machine or equipment can be included as a subordinate part of a transfer or assignment of real estate.
The rental of property currently includes the provision of gas, water, electricity, heating, and network equipment if the provision is part of the lease. In accordance with the case law of the Court of Justice of the EU, this is being amended to refer to ancillary (part of) provisions, and the current list is being made illustrative. In practice, according to the government, this means no change from today.
When it comes to the reconciliation rules, the government is not proposing any substantive changes. However, the definition of operating assets will cease to apply and will be replaced with the new definition, which is ”machinery, equipment, and special furnishings if they have been added to a building for purposes other than residential and have been acquired for direct use in a specific operation conducted on the property.”.
Entry into force
The proposed provisions shall enter into force on 1 January 2017.
When adjusting deductions for input tax, older regulations shall still apply to deductions for which the correction period commenced before the entry into force. However, upon the transfer of an investment good, adjustments shall be made according to the regulations applicable at the time of divestment or transfer, with certain adjustments. Otherwise, older regulations shall continue to apply to value added tax relating to the period before the entry into force.
Commentary
Property is a complex area, and the new definition means a new approach, as the link to the Land Code is abolished. The definition is not evident from the ML, but one has to go to the ordinance to read it, which may seem strange if one wants to make things simple. However, the advantage from the legislator's point of view is that the ML is always up-to-date.
What items become property in different buildings? Since it is a matter of an EU law, delimitations to legal application have been deliberately left out, as the assessment of whether something is property must be made based on the circumstances in the individual case.
There has been a fair amount of criticism from the referral bodies because the consequences have not been sufficiently investigated.
We can hopefully expect statements from the Tax Agency. The Confederation of Swedish Enterprise, the Swedish Construction Federation, the Federation of Swedish Property Owners, and the Swedish Association of Local Authorities and Regions have sent a letter to the agency requesting to know which of the agency's 62 statements will not be affected and which will be updated.
Source: Wolters Kluwer – Tax Information
