Lessor loses VAT deduction case

The Supreme Administrative Court (SAC) expressed its opinion on claiming a reduced VAT deduction in a case involving air-conditioning repair in a building where premises were leased both with and without VAT. According to the court, as the link between the taxable supply received and the taxable supply provided had not been demonstrated, claiming a reduced VAT deduction was impossible.

Taxpayer and entrepreneur V. B. (Case No. 1 Afs 253/2018) had been leasing out non-residential premises on the ground floor and on the first floor of a building as VAT exempt, while leasing out premises on the second floor of the same building with VAT. In the premises leased out without VAT, air conditioning units had to be replaced and VAT deduction in a reduced amount was claimed on the supply. The tax administrator challenged this, arguing that although the building where the leased out premises were located was not formally divided into units, it was factually separated into clearly identifiable parts (as defined by lease agreements) with a different tax treatment.

Neither the tax administrator nor the SAC challenged that the air conditioning units had become a part of the building. The heart of the dispute was whether the received taxable supply was used by the claimant to provide taxable supplies; this is crucial in the context of the VAT neutrality principle.

The SAC held that the repair of the air conditioning in the premises leased out without VAT had no effect on the second floor where premises were leased out with VAT. Therefore, there was no link between the taxable supply received (i.e. the air conditioning repair) and the taxable supply provided (i.e. the lease of premises on the second floor, with VAT). The claimant failed to demonstrate any such link, therefore did not meet the conditions for claiming a reduced VAT deduction.