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SAC: Is it always possible to depreciate a movable item separately?

In judgment 8 Afs 229/2021-52, the Supreme Administrative Court (SAC) concluded that a technology such as a stationary power plant is a technical improvement to a building with which it forms a single functional unit and not a separate movable item. Therefore, it cannot be depreciated separately. In this context, the judgment deals with the application of the GFD Instruction defining equipment and items that can be regarded as separate movable items and depreciated in a separate depreciation group.

A taxpayer (a heating company) acquired a stationary power plant as a backup power source, which they placed in an unused building of a former boiler station. To put it into operation, they made the necessary modifications to the premises, which were subject to a building permit and an occupancy approval, and then started to depreciate the power plant as a separate tangible asset.

The taxpayer based this approach on then-valid GFD Instruction D-6, according to which technological equipment to produce electricity shall be regarded as an independent movable item even though it is firmly connected to a building. The tax administrator challenged this approach, arguing that it was a technological (technical) improvement to the building, which had to be depreciated in the fourth depreciation group. Expenses in the form of the claimed tax depreciation of the power plant were thus treated by the tax administrator as tax non-deductible.

GFD instruction on the application of the Income Tax Act must be applied on a case-by-case basis
In its decision, the SAC upheld the conclusions of the tax administrator and the regional court, stating that each case must always be assessed individually. In the given case, the functional connection of the buildings and the stationary power plant and the purpose of the structural and technical design of the buildings were decisive. The taxpayer acquired the power plant as a whole and carried out significant structural modifications to their real property for the sole purpose of placing the power plant there and connecting it to the building.

The power plant technology and building are an interconnected system consisting of a technological and structural part that form a single, functionally inseparable unit. By separating the power plant from the building, the function and purpose of the real property would cease to exist. The taxpayer’s arguments referring to technologies of nuclear power plants or cremation ovens, which are also part of the buildings but are depreciated as separate items, did not stand with the court. According to the SAC, although GFD Instruction D-6 states that technological equipment for power generation should be regarded as a separate movable item, it is always necessary to consider the specific case at hand when applying the regulations.

When acquiring major equipment (even if defined by the GFD Instruction as a separate movable item), we recommend considering whether their placement in a building may have led to such structural, technical and functional modifications to the building that they should be regarded as a technical improvement to the building.