As a general consumption tax, value added tax (VAT) is designed to burden non-business, i.e. private, consumption. Within the business sphere, there is – in principle - a right to deduct input tax in order to avoid multiple taxation. This principle reaches its limits where arrangements serve solely to grant the taxable person a tax advantage that is not intended by the legislator.
A recent decision by the Federal Administrative Court (FAC) dated January 8, 2025 (A-1146/2023) addresses this issue in the context of a holiday property.
FACTS OF THE CASE AND DECISION OF THE FEDERAL ADMINISTRATIVE COURT
A. AG was acquired by its sole shareholder in 2017 and held a single vacation property. The company was registered as a company subject to VAT, which entitled it to claim input tax deduction for extensive renovation costs. At the same time, it rented out the property exclusively to the sole shareholder, with this rental being subject to VAT at the special rate for accommodation services.
Following a VAT inspection by the Swiss Federal Tax Administration (FTA) in 2021, the company was retroactively deleted from the register of VAT-liable persons. The FTA justified this with the existence of tax avoidance, as the chosen structure was solely aimed at generating an input tax deduction that the sole shareholder could not have claimed privately. The FAC confirmed this assessment.
CRITERIA FOR TAX AVOIDANCE
According to the established practice of the FAC and the Federal Supreme Court, three elements are decisive for the affirmation of tax avoidance:
- Objective element: The chosen legal structure is unusual and inappropriate. In this case, the sole purpose of the company was to hold a vacation property and rent it out to the sole shareholder, without any economic or business reasons being apparent.
- Subjective element: The chosen structure primarily served the purpose of tax avoidance by obtaining an input tax deduction through the VAT obligation that would otherwise not have been possible.
- Effective element: The tax savings were considerable, in particular due to the input tax deduction for renovation costs that would otherwise not have been deductible for private assets.
As all three criteria were met, the tax avoidance was affirmed and the company's tax liability was retroactively revoked.
It is interesting to compare this with the judgments A-4190/2020 and A-4195/2020 of 15. December 2021. In these cases, no tax avoidance was assumed, whereby, in the opinion of the court, the fact that no input tax deductions were claimed played a role. Instead, the companies invoiced using the net VAT rate method, which is why no significant tax savings were made. The third condition, the effective element, which requires a significant tax saving, was therefore missing. In the current case, however, the chosen structure led to a significant input tax surplus, which resulted from the high renovation costs for which the company claimed the input tax deduction. At the same time, the rental income from the exclusive letting to the sole shareholder was only taxed at the reduced special rate for accommodation services. As a result, the input tax claimed significantly exceeded the VAT owed, which the court classified as tax abuse, meaning that tax avoidance was confirmed.
DE FACTO REVERSAL OF THE BURDEN OF PROOF FOR THE TAXPAYER
One noteworthy point of the ruling is the distribution of the burden of proof. In principle, it is up to the tax authority to prove the existence of an abusive arrangement. However, the FAC states that there is a natural presumption of a peculiar arrangement as soon as significant elements speak in favour of tax optimization. In practice, this leads to a de facto reversal of the burden of proof, as taxpayers must rebut the natural presumption of tax avoidance.
In the current case, A. AG was unable to provide sufficient business reasons for its structure. The court emphasized that economic or business motives of the company itself are decisive - not the entrepreneurial activities of the sole shareholder. This did not invalidate the natural presumption. This approach shows that taxpayers who use similar structures must provide well-documented economic reasons for their choice in order to avoid a tax adjustment.
EFFECTS ON PRACTICE
The ruling once again underlines the fact that holding vacation properties via companies is not illegal per se, but an economic purpose must be proven that goes beyond mere tax savings. The administration and the Federal Administrative Court appear to apply strict standards in this regard.
In such situations, companies and taxpayers should therefore carefully examine whether the business reason for the chosen structure can be adequately justified. If this is not the case, there is a risk of a tax correction with considerable financial consequences. The decision has been referred to the Federal Supreme Court and it remains to be seen whether it will stand.
UPDATE – CONFIRMATION BY THE FEDERAL SUPREME COURT WITH A DIFFERENT REASONING
By decision 9C_107/2025 of 26 January 2026, the Federal Supreme Court (FSC) confirmed the FAC ruling and dismissed the appeal of A. AG. Notably, the FSC followed a different approach. While the FAC primarily focused on the existence of tax avoidance, the Supreme Court first examined the company’s subjective tax liability. In line with its case law on aircraft and asset-holding structures, it asked upfront whether there was any business activity at all within the meaning of VAT law.
The FSC answered this in the negative in the present case: the holiday property was rented exclusively to the sole shareholder. There was no third-party rental or independent economic market participation. As a result, no commercial activity existed, and A. AG was, on this basis alone, not entitled to deduct input tax.
The Supreme Court therefore considered an examination of tax avoidance to be no longer decisive. Nevertheless, it explicitly confirmed that the FAC’s considerations regarding tax avoidance would not have been questionable in the event that a tax liability had existed.
This decision shifts the focus away from the abuse doctrine towards a preliminary examination of subjective tax liability. For comparable structures, this means that the mere absence of business activity can already lead to the denial of input tax deduction – without the need to meet the high thresholds required to establish tax avoidance.
