SAC on simultaneous technical improvement and repair of real property
In the tax administrator’s opinion, a company carrying out extensive structural modifications to a real property should treat all the work collectively as a technical improvement, and not part of it as repairs. The Supreme Administrative Court (Judgment No. 6 Afs 273/2022-43) disagreed with the tax administrator's generalising conclusions and held that it was necessary to examine the mutual interdependence and time sequence of the work carried out.
The company carried out extensive construction work (renovation) on a hotel building (technical improvement). In addition, they also carried out repairs of the heating system, carpeting, and CCTV system. The company insisted that the repairs involved merely removing physical wear and tear and, as the work was carried out in other parts of the hotel, there was no connection with the technical improvement.
However, the tax administrator concluded that the renovation carried out was so extensive that all the work had to be regarded as a technical improvement, also because the company had not sufficiently proven that it was a mere repair.
The SAC reiterated two possible approaches to the situation, referring to its earlier case law:
- If construction work is carried out within a single construction project and is aimed at changing the technical parameters and the manner of use of the property, it is not necessary to examine the nature of each partial repair individually.
- The other view is the opposite - repairs and a technical improvement can be carried out within one investment project.
So how should we proceed? According to the SAC, the line between repair and technical improvement must be assessed on a case-by-case basis, using sufficiently conclusive evidence.
In view of the evidence provided and the overall course of the proceedings, the SAC in its judgment granted the objections and sided with the company. The SAC believed that it was not correct to assess the entire investment project simply as a technical improvement and agreed with the company that the work being assessed (the repairs) had no material or temporal connection with the technical improvement carried out on the building. Even the state of disrepair of the property was not in itself decisive for the work to be assessed as a technical improvement.
Moreover, the SAC found the tax administrator's procedure wrong as the company was not given the chance to prove the technical condition of the equipment and the materials used for the repair. The tax administrator did not allow proposed witnesses to be examined and denied the company this opportunity arguing that the witness statements were redundant in this case.
The SAC judgment confirms that in the context of structural modifications of real property, each case must be examined on an individual basis, and it is not possible to classify all work carried out within a renovation automatically as technical improvement.
In practice, it turns out that the line between repair and technical improvement is often blurred. Companies thus must have sufficient evidence specifying the technical parameters of the repairs.