Consideration for transfer of technical improvement – good news on the horizon?
In the autumn of 2014, the Supreme Administrative Court’s ruling, stating that the right to carry out tax depreciation of a technical improvement cannot be transferred between tenants, stirred the tax waters considerably. The case has now returned to the SAC, which, through the perspective of another panel of judges, admitted a certain shift in its interpretation. This gives taxpayers new hope that transfers of technical improvements for consideration will be treated more favourably from a tax perspective.
Let us briefly recapitulate the background: a tenant carried out a loan-financed technical improvement of a leased building. Subsequently, the lease was ceded (transferred) and the original and the new tenant concluded an agreement on the settlement of rights and obligations. The transfer of the technical improvement and of the liability arising from a portion of the loan were part of the agreement, as was consideration for both transfers. The new tenant then depreciated the thus acquired technical improvement for tax purposes.
In its original judgement, the SAC closed the entire matter by stating that it was not possible to transfer the right to depreciate technical improvement. The payment for the transfer of the technical improvement could hence not be treated as a taxable supply. The new tenant thus did not have an entitlement to deduct VAT on entry.
The subsequent judgement of the second panel of judges published under No. 2 Afs 62/2015-28 fully agreed with the conclusion that the right to carry out the tax depreciation of a technical improvement cannot be transferred between tenants, and that the depreciation of the technical improvement can only be finished by the owner of the real property. However, the second panel presented a slightly different view of the matter, giving its opinion on the nature of the consideration negotiated between the two tenants. In the case in question, the consideration was negotiated for two supplies – assistance services regarding the transfer of the liability arising from the part of the loan (the original tenant was to play the role of “financial buffer” between the new tenant and the creditor) on one hand, and the transfer of the technical improvement itself (consideration equal to its net book value) on the other.
As for the consideration for the first supply, the SAC used an example to demonstrate that a rational relationship does not always have to be direct, and may operate as a chain of relationships. For instance, the relationship between the original and the new tenant may consist of ensuring the undisturbed factual use and operation of the premises, which will serve to generate income. In other words, the negotiated consideration for the assistance service, in the specified scope, may have an economic logic and sense, according to the court. If economic substance is proved, a taxable supply may be the case.
As for the transfer of the technical improvement, the SAC concluded that the supply between the original and the new tenant arising from a private-law agreement on the transfer of rights and obligations from a lease agreement should be treated as a tax deductible expense (subject to meeting the statutory condition of the expense being incurred to generate, secure and maintain income). According to the SAC, in these cases the transfer of the technical improvement should be viewed as a transfer of a functional economic unit, although no transfer in terms of ownership title has taken place. In this case as well, the SAC emphasized that the transfer must have a proper economic substance. Let us hope that the court thus have indicated a future shift in the tax administrators’ approach to this issue.