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Abuse of rights in real estate leases and VAT

The Municipal Court in Prague ruled on the distinction between leases of real estate and accommodation services, and its implications for VAT treatment. The court concluded that the case in question involved an abuse of rights.

The dispute concerned a business transaction where a company purchased housing units for the purpose of leasing them to another company. The other company then subleased the units to a third company, which provided them to its employees for use. The sublessee classified the letting of the housing units to employees as an accommodation service and paid output VAT. All three companies then claimed the right to deduct VAT.

The heart of the dispute was whether there was an arrangement of relations between the companies for the purpose of obtaining a tax advantage, and whether the conduct by the owner of the housing units constituted an abuse of rights. In this respect, the municipal court dealt with the question whether the case in fact involved a (taxable) accommodation service, or rather a (VAT exempt) lease of real estate. The Supreme Administrative Court previously ruled ‘lease’ to mean the transfer of the right to use real estate in a way as if the tenant were its owner, for an agreed-upon period of time, and for consideration. The lease of real estate is a relatively passive activity that does not include any other additional services.

The municipal court took into account that the employees had been using the housing units for a long time (at least several months). The fee had been agreed as per bed per day, but the employees could use the entire housing unit, including accessories, and had their permanent residence at the address. They were not provided with services typical of an accommodation service, such as cleaning or the provision of sanitary supplies, nor were they charged a local accommodation fee. The entrance to the apartment building was equipped with bells for the individual housing units, also not typical for an accommodation service. The court also pointed out that the real estate register listed the units as apartments.

The court therefore assessed the service as a lease relationship, as the company had not proved the provision of additional services to users of the housing units, and thus agreed with the tax administrator. At the same time, the court concluded that the entire chain of transactions had been artificially created to obtain a tax advantage, and that the conditions for abuse of rights as defined by the judgment of the European Court of Justice C-255/02 (Halifax) had been met. The court thus confirmed the tax administrator's decision to reject the right to deduct VAT.