As a general consumption tax, value added tax (VAT) is designed to burden non-business, i.e. private, consumption. Within the business sphere, on the other hand, there is a fundamental right to deduct input tax in order to avoid multiple tax burdens. However, this principle reaches its limits if structures are used solely to obtain a tax advantage that is not provided for by law. Such abusive structures are often the subject of case law, particularly in connection with luxury goods such as private jets, yachts or vacation properties.
A recent ruling by the Federal Administrative Court (FAC) dated January 8, 2025 (A-1146/2023) deals with such a topic. It deals with the misuse of VAT regulations in connection with a vacation property.
FACTS OF THE CASE AND DECISION OF THE FEDERAL ADMINISTRATIVE COURT
A-1146/2023
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
Das Urteil unterstreicht erneut, dass das Halten von Ferienimmobilien über Gesellschaften zwar nicht per se unzulässig ist, jedoch ein wirtschaftlicher Zweck nachgewiesen werden muss, der über die reine Steuerersparnis hinausgeht. Dabei scheinen Verwaltung und Bundesverwaltungsgericht strenge Massstäbe anzulegen.
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.
