Value added tax and real estate is one of the perennial favourites in VAT advisory services. The regulations are complex in detail and the amounts for individual transactions are comparatively high. In our blog, we present relevant problem areas in loose succession and discuss what to look out for. In the first part, we deal with VAT issues in connection with the transfer of real estate.
There are basically three ways to account for the sale of a property for VAT purposes:
The transfer as an exempt supply means that the sales transaction itself does not trigger VAT. As the supply itself is "non-taxable", the (taxable) seller cannot claim input tax deduction on the input taxburdened expenses in connection with the transaction.
If the (taxable) seller has used the property until the sale (in whole or in part) for purposes entitling him to deduct input tax, the sale as a taxexempt supply constitutes a "change of use" (old use: partially or fully entitling to deduct input tax, new use: not entitling to deduct input tax). Ac-cordingly, the seller must make an input tax adjustment due to own use in accordance with Art. 31 of the VAT Act.
The taxable company Hans Muster AG in Walchwil holds a property as part of its business assets. The property houses the joinery of Hans Muster AG. In October 2014, Hans Muster AG had the roof of the property recovered. Hans Muster AG claimed the VAT invoiced for this as input tax. On 1 July 2024, Hans Muster AG sells the property to Müller Immo AG. The sale is to take place in accordance with the statutory base case as an exempt supply.
Hans Muster AG previously used the property extensively for taxable purposes (carpentry). The sale as an exempt supply results in a change of use. Accordingly, Hans Muster AG must correct the input tax deduction in connection with the property. In this case, the input tax deduction in connection with the renovation of the roof is affected. The extent of the correction depends on the current value of the renovation. To determine the current value, the input tax amount is reduced by 5% on a straightline basis for each year that has elapsed for immovable property. The accounting treatment is not rele-vant. Accordingly, Hans Muster AG must correct the originally deducted input tax by 50% (5% * 10 years, the current year of sale is generally not taken into account when deter-mining the current value).
The purchaser acquires the property free of VAT. If the property is used for non-taxable purposes (e.g. as a retirement home), there is no risk of a change of use for the purchaser. On the other hand, the purchaser does not transfer any potential for de-taxation.
Hans Muster AG includes the input tax adjustment to be made by it in the sales price. Müller Immo AG initially intended to demolish the business premises and build a modern residential property on the site. It is changing its plans to the effect that shops are now planned on the ground floor and offices on the first floor.
In the case of the construction of a residential property, Müller Immo AG is interested in minimising the input tax burden in connection with the acquisition of the property. In the case of taxable use (shops and office space can be let/sold on an optin basis), the input tax burden plays a rather minor role, as Müller Immo AG is entitled to deduct input tax. The "hidden" VAT transferred from the input tax correction of Hans Muster AG, on the other hand, results in a definitive additional charge for Müller Immo AG.
If the contracting parties have not made any special agreements and VAT is not shown in the purchase contract, the sale is to be treated as a tax-exempt transaction.
As a first alternative, the taxable seller of a property has the option of voluntarily subjecting the sale to VAT ("option"). The prerequisite for exercising this option is that the property is not used by the buyer exclusively for residential purposes. If the buyer acquires the property in order to sublet it for residential purposes, the option is possible, as the buyer himself does not intend to use the property exclusively for residential purposes.
The seller can also opt for only part of the sale of the property. When selling developed properties, the seller can claim input tax on the costs directly related to the sale in full or in part (depending on the option).
The taxable company Hans Muster AG in Walchwil holds a property as part of its business assets. The property houses Hans Muster AG's joinery workshop. Above it is a penthouse with a view of Lake Zug. In October 2014, Hans Muster AG had all the windows in the property replaced. Hans Muster AG claimed the VAT invoiced for this as in-put tax insofar as the windows of the joinery were affected. On 1 July 2024, Hans Mus-ter AG sold the property to Müller Immo AG.
Hans Muster has the option of selling the property as a whole on an optin basis, as Mül-ler Immo AG will not use the penthouse flat itself for residential purposes. By opting for VAT for the transfer, Hans Muster AG would not have to make an input tax adjustment in relation to the input tax claimed in connection with the renovation of the windows in the joinery area. Rather, there is a change of use with regard to the penthouse flat, which entitles Hans Muster AG to make a input tax deduction with regard to the input tax not claimed in connection with the renovation of the windows in the penthouse flat area Inso-far as Müller Immo AG continues the previous use of the penthouse flat, its opted trans-fer will result in an additional VAT charge for Müller Immo AG, which will presumably have an impact on the purchase price negotiations.
There is also the possibility that Hans Muster AG merely opts for the sale of the joinery and transfers the penthouse flat as a taxexempt supply. In this case, Max Muster AG does not have to calculate either an own-consumption correction or a subsequent input tax deduction.
Formally, a sale with an option only requires that the VAT is shown separately in the purchase contract on the purchase price without the value of the land or that the declaration is made in the statement in sections 200/205.
When using the notification procedure, VAT is settled with the FTA by notification instead of payment. The notification procedure therefore offers the possibility of processing the transaction without the buyer having to finance the VAT. By using the notification procedure, the buyer assumes the seller's taxable base and the utilisation level entitling to input tax deduction for the transferred assets.
The taxable company Hans Muster AG in Walchwil holds a property as part of its busi-ness assets. The property houses Hans Muster AG's joinery workshop. Above it is a penthouse with a view of Lake Zug. In October 2014, Hans Muster AG had all the windows in the property replaced. Hans Muster AG claimed the VAT invoiced for this as in-put tax insofar as the windows of the joinery were affected. On 1 July 2024, Hans Mus-ter AG sells the property to Müller Immo AG. The transfer is handled by means of a noti-fication procedure.
Müller Immo AG takes the place of Hans Muster AG with regard to the property for VAT purposes, i.e. it takes over a property that was used in the taxable area with regard to the joinery and in the taxexempt area with regard to the penthouse. If it rents the penthouse to a business consultant in the future, it can claim a subsequent input tax deduction for the replacement of the windows in 2014 (50% of the original input VAT paid). The pre-requisite is that she can prove the extent to which VAT was originally invoiced and paid.
In connection with possible changes of use after the transfer in the notification procedure, proof of previous use by the seller is of central importance. It is the buyer's responsibility to provide this proof. He must ensure that he receives all input tax receipts relevant to a change of use, evidence of valueenhancing expenses or extensive renovations over the last 20 years and records of previous input tax corrections.
If the buyer is unable to provide this evidence, they run the risk of input tax corrections being calculated on the basis of the purchase price due to changes in use. In this case, the FTA assumes that the property has been used entirely within the taxable area to date.
In example 4, Hans Muster AG is unable to provide any evidence of the history of the property due to a water ingress in its archive.
If Müller Immo AG continues to use the penthouse for residential purposes, it would have to make an input tax adjustment due to a lack of evidence of the previous use. This is based on the purchase price with Hans Muster AG. If it rents the penthouse to a man-agement consultant in the future, it cannot claim a subsequent input tax deduction.
Accordingly, the notification procedure should be used with caution in property transactions if there are uncertainties regarding the previous or future use and there are gaps in the documen-tation.
Even if the above summary of VAT structuring options in connection with real estate transactions is only an initial overview, it is clear that real estate transactions should also be thoroughly examined in advance from a VAT perspective in order to make optimum use of the structuring options available. We have summarised the various structuring options in simplified form below
|
| Exempted supply | Taxed supply ("opted") | Notification procedure |
Tax liability of the seller required? | No | Yes | Yes |
Tax liability of the buyer required? | No | No | Yes |
Note/application requi-red? | No | Yes | Yes |
Is VAT due for pay-ment? | No | Yes | No |
Does the seller possibly have to take into ac-count the correction of the input VAT? | No | No | No |
Can the seller possibly claim subsequent input tax deduction? | No | Yes | No |
Does the buyer possibly have to take into ac-count a correction of the input VAT? | No | Yes | Yes |
Can the buyer possibly claim subsequent input tax deduction? | No | No | Yes |
Is the VAT history of the property relevant? | No | No | Yes |
The world of e-commerce has seen unprecedented expansion in recent years, with digital platforms and online commerce revolutionising the global market. However, with this growth comes complex challenges, particularly with regard to value added tax (VAT) and its application to cross-border trans-actions. The dynamic nature of e-commerce, combined with international business practices, has led to a complex legal landscape that poses new challenges for participants in e-commerce. The follow-ing article deals primarily with VAT issues in b2c trade (i.e. sales to consumers, as opposed to busi-nesses). This is a rough initial overview. The relevant regulations are complex and should therefore be examined on a case-by-case basis based on the specific business model.
No thresholds for third countries!
Anyone who provides b2b deliveries (and certain services) in the EU without having a fixed place of business in the EU may be liable to pay tax immediately (i.e. from the first euro of turnover). Special schemes for small businesses usually only apply to companies based in an EU member state.
Settling VAT in 27 member states: the One Stop Shop
In the case of b2c deliveries to different member states (so-called distance sales) from an EU ware-house (duty paid goods), the VAT rate of the country in which the warehouse is located initially ap-plies.
If the turnover from such distance sales exceeds EUR 10,000 per year across the EU, the VAT rate of the country in which the customer is based applies. Until recently, e-commerce traders may have had to register for VAT separately in all member states in order to fulfil their reporting and accounting obligations. Since 2021, it has been possible for them to fulfil their reporting and accounting obliga-tions via a central registration, the so-called One Stop Shop ("OSS").
Example: as above, but the retailer now has a turnover of EUR 17,000 p.a., of which EUR 6,000 is generated in Austria and EUR 5,000 in the Netherlands.
Delivering goods from a third country to the EU: the Import One Stop Shop
Like distance sales within the EU, distance sales from a third country are also subject to VAT at the VAT rate applicable in the customer's country. Up to a goods value of EUR 150, retailers have the option of processing the corresponding distance sales via the so-called Import One Stop Shop (IOSS).
If the application of the IOSS is waived, a special regulation may apply, according to which the import tax is collected by the freight forwarder directly from the respective customer. Freight forwarders regularly charge their customers additionally for their customs clearance services - so that this proce-dure appears expensive and less transparent from the customer's point of view.
Finally, it is possible for distance sellers to register in the respective member states of their custom-ers and invoice their deliveries to the national tax authorities themselves.
Alternatively, the retailer has the option of applying the "special regulations for the import of consignments with a material value of no more than 150 euros" (as described in the corre-sponding Section 21a of the German VAT Act). In this case, the freight forwarder collects the tax (and any handling surcharges) directly from the customer.
Thirdly, Swiss traders still have the option of registering for VAT in Austria, Germany and the Netherlands and settling VAT locally.
Platform taxation
Special rules have applied in the EU for several years to distance sales that are initiated or processed via so-called "electronic interfaces", provided that the goods are dispatched within the EU and the seller itself is based in a third country. An electronic interface is, for example, an electronic market-place or an electronic platform that enables the buyer and seller to come into contact, resulting in the delivery of goods to the recipient of the service (e.g. Amazon Marketplace, ebay or Alibaba).
In cases where an electronic interface is included in the supply chain in this sense, a so-called "supply chain fiction" occurs: While there is actually only a single sales transaction, two supplies are fictitious for VAT purposes by assuming a (first) supply from the trader to the operator of the electronic inter-face and a (second) supply from the operator of the electronic interface to the final purchaser. The fictitious supply from the online trader not established in the Community to the operator of the elec-tronic interface is exempt from VAT. The supply of the electronic interface to the end customer fol-lows the general principles for distance sales.
Dropshipping and other modern sales channels offer tantalising opportunities to tap into new sources of income. It is essential to consider the (value-added) tax consequences right from the start. If you wait until your business has reached a critical size, you will be chasing your own past failures. With a clever setup, the business can be scaled without major risks and the administra-tive effort can be kept within reasonable limits.
In a recent ruling (BGer 9C_154/2023 of 3 January 2024), the Fed-eral Supreme Court dealt with the admissibility of input tax deduction for acquisition tax (VAT on services purchased from abroad) for con-sultancy services in connection with the sale of shareholdings. Ac-cordingly, a person liable for VAT in Switzerland is only entitled to claim the declared purchase tax as input tax if the corresponding ser-vices were provided in a period in which the taxable person was al-ready liable for VAT (registered). The taxable person is responsible for providing proof of this.
A AG, which was only entered in the VAT register as a taxable person on 1 April 2019, planned the sale of shares in two companies. To this end, it commissioned several foreign service pro-viders to prepare, plan and implement the sale, who were to provide advice in the areas of in-vestment, auditing, tax and law, depending on their expertise. The consultancy agreements be-tween A AG and the consultants were concluded in 2014 and 2018 respectively, i.e. before A AG was registered as a company subject to VAT. The project was then completed in May 2019 with the successful sale of the shares. All consultants invoiced their services after 1 April 2019, whereby A AG, which was now liable for VAT, duly declared the purchase tax and reclaimed the resulting VAT amount as input tax. None of these purchased services were capitalised during the duration of the project from 2014 to May 2019.
Following an examination, the FTA largely refused the input tax deduction, arguing that the tax-payer could only deduct the input tax on services that (regardless of the invoice date) had actu-ally been provided after it was entered in the VAT register on 1 April 2019 (cut-off date). Due to a lack of detailed information on which consultant provided which services at exactly what time, the FTA methodically assumed an even, linear purchase of services according to the duration of the contracts (pro rata temporis). The input tax deduction was therefore only permitted to the extent that the services were provided after the reference date according to this proportional distribution of fees.
The position of the FTA, according to which the right to deduct input tax can only cover supplies that were received during the period of existing tax liability, was not (or no longer) disputed in the proceedings before the Federal Supreme Court.
The court therefore focussed on the question of proving when the advisory services were actu-ally provided. In accordance with the principle that facts justifying and increasing the tax must be proven by the tax authority, and facts reducing and excluding the tax must be proven by the per-son liable to pay the tax, the court held that A AG had the burden of proof that the services from the consultancy agreements concluded long before the VAT registration were only provided after entry in the register of taxable persons. A AG had failed to provide this evidence. In the absence of any other evidence, the approach of the FTA, which assumed a continuous provision of services over the period since the conclusion of the contract and accordingly divided the fees "pro rata temporis", was not objectionable in the present case.
In the sense of a contingent application, A AG had argued that it was entitled to a claim for sub-sequent input tax deduction. This is the possibility of correcting the input tax deduction (pro rata) at a later point in time than the purchase of the service if the conditions for the input tax deduc-tion subsequently materialise, Art. 32 VAT Act.
The input tax deduction on goods and services put to use can be corrected if they are still avail-able and have a current value at the time when the conditions for input tax deduction have mate-rialised, Art. 72 para. 2 sentence 1 VATO.
However, there is a legal presumption that services in the areas of consulting, accounting, re-cruitment, management and advertising are already consumed and no longer available at the time they are purchased, Art. 72 para. 2 sentence 2 VATO. In the opinion of the court, the standard codifies, to a certain extent, an obligation for immediate depreciation, solely in relation to the VAT treatment. The accounting treatment (which Art. 70 para. 1 sentence 1 of the VAT Ordi-nance generally prescribes) is cancelled out by this special standard.
The generally generous regulations on input tax deduction in Switzerland can sometimes lead to a certain carelessness in the area of VAT. The judgement makes it clear that early VAT registra-tion of the parties involved in connection with potential transactions should always be carefully checked and is usually advisable.
The judgement is not only relevant in the context of transactions, but also, for example, in the case of business start-ups, especially if a mandatory tax liability is not necessarily assumed at the beginning of the entrepreneurial activity.
In addition, the judgement shows that particular attention should be paid to documenting the timing of the provision of services - for example, through detailed invoicing or the documentation of certain "project milestones".
Under the current VAT Act, the right to deduct input VAT is broadly defined. Accordingly, the taxable person can in principle deduct the in- put VAT invoiced to him and paid by him within the scope of his busi- ness activity, Art. 28 para. 1 MWSTG. However, one of the require- ments is that the input tax was incurred as part of the taxable person's "entrepreneurial activity". Naturally, this raises the question of how to distinguish between entrepreneurial and non-entrepreneurial activities.
In its judgement 9C_651/ 2022, the Federal Supreme Court dealt with this distinction between the entrepreneurial and non- entrepreneurial spheres and the corresponding consequences for input VAT deduction.
The complainant in the underlying dispute was an association whose purpose was to support and promote ecclesiastical and charitable causes in Switzerland and abroad. In order to achieve its purpose, the association organised Christian musicals. Approximately 70% of the musicals were financed by donations and no admission fees were charged.
In addition to the income from donations, the association also generated income from services, such as the sale of food in connection with the musicals, the sale of other items (e.g. books; T- shirts), from publicity services (sponsoring) in favour of companies and accommodation services. On the occasion of a VAT inspection, the FTA denied the association an input VAT deduction in connection with the organisation of the musicals. The association appealed against this.
A possible non-entrepreneurial sphere is therefore characterised by the fact that the business unit in question either does not generate any income from services or at least does not generate such income in a sustainable manner. An independent non-entrepreneurial sphere can therefore only be assumed if the separation can be made sufficiently clear - whether this is due to a separate activity that is clearly recognisable to the outside world or a clear purpose that differs from that of the entrepreneurial activity. If this is not the case, the principle of the "unity of the company" remains with a single, entrepreneurial sphere.
In the present case, the main purpose of the organisation of the Christian musicals is the non-profit or idealistic activity of the association - and not the sale of food, books or T-shirts or the provision of publicity and accommodation services. With the musicals, the association therefore pursues ide- alistic purposes and not the generation of income. In this respect, entrepreneurial activity is there- fore lacking.
This means that the idealistic purpose of the musical performances can be clearly distinguished from that of the association's entrepreneurial activities (sale of food, etc.) and a separation can be made between the rather small entrepreneurial sphere and the significantly larger non-entrepre- neurial sphere. The close factual link between the entrepreneurial and non-entrepreneurial activi- ties is irrelevant: The association does not perform the musicals in order to promote its entrepre- neurial activities, but merely uses the (ideally motivated) performances as an opportunity to carry out a subordinate entrepreneurial activity.
As a result, the Federal Supreme Court confirms its previous case law on the distinction between the entrepreneurial and non-entrepreneurial sphere. The argumentation appears to be driven to a significant extent by considerations of achieving "unfair" tax advantages by using a comparatively subordinate business area in order to be able to deduct input tax incurred in the supposedly non- entrepreneurial sphere.
As part of an inspection, the FTA took the view that the taxpayer had wrongly qualified the investment contribution from the lottery fund as a donation and not as a subsidy and had therefore wrongly not amended its input tax deduction. In particular, the FTA claimed that the contribution was based on a legal basis and was also earmarked for a specific purpose, namely as an investment contribution for the construction of the musculoskeletal research and development centre, the activities of which could be considered to be in the public interest. The taxpayer argued that the funds should be recognised as a donation and not as a subsidy.
Accordingly, it was disputed in this case whether the lottery fund had made an input tax-effective subsidy or an input tax-neutral donation.
Decision of the Federal Supreme CourtThe Federal Supreme Court examines three key criteria for distinguishing a subsidy from a donation:
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