Deduction of VAT by the lessor in the light of a judgement of the Supreme Administrative Court (SAC)

18. 12. 2019

The SAC’s recent judgement 1 Afs 253/2018 ended the dispute between the financial administration and the lessor that applied for a reduced entitlement to deduct VAT on an air-conditioning repair carried out in a building partially leased with VAT and partially as tax-exempt. According to the SAC’s findings, a sufficiently direct and close link between a specific input transaction and a taxable output transaction was not proved and, therefore, a reduced deduction could not be applied for.

The company V. B. leased the building, ground floor and first floor as a tax-exempt transaction without VAT and the second floor as a taxable transaction with VAT. On the premises leased without VAT, the lessor repaired the air-conditioning unit, applying for a reduced tax deduction from the transaction received. The administrator challenged and, subsequently, rejected the reduced deduction, stating that the repair was made fully and solely in connection with the tax-exempt transaction, i.e. it is only related to the premises leased without VAT, not to the entire building.

V. B.’s argumentation that the air-conditioning unit became part of the entire building was not disputed by the SAC. In this context, however, the SAC further stated that the fact that the building is not divided into separate units is not sufficient for the technical improvement to be automatically related to the improvement of the entire building, and not to separately defined non-residential premises, for tax purposes. According to the SAC, the fact that the building was de facto divided into clearly identifiable parts with a different tax regime was defined in detail, for example, in the lease contracts.

The key question was whether or not the taxable transaction received was used to carry out the company’s taxable transactions. The SAC stated that the repair of the air-conditioning on the premises leased without VAT had no effect on the second floor, where the premises are leased with VAT. Consequently, there was no link between the taxable transaction received, i.e. repair of the air-conditioning system, and the taxable transaction carried out, i.e. lease of the premises on the second floor subject to VAT. The company did not prove any link and, thus, did not meet the conditions for reduced VAT deduction.

Of course, the decision may also be interpreted as meaning that if the payer carries out technical improvement relating solely to separate premises serving for taxable transactions, the payer may fully claim deduction even if located in a building which also serves for tax-exempt transactions.

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