- Reasons for the change of practice
In SKM2021.84.LSR of 8 September 2020, the National Tax Tribunal rejected the Danish Tax Agency’s binding answer regarding the question of whether the applicant must collect VAT on the transfer of a real property by expropriation.
Referring to the ruling of the European Court of Justice in case C-665/16, Gmina Wroclaw, the National Tax Court found that the Danish Tax Agency’s answer must be changed already because expropriation against compensation, in the National Tax Court’s opinion, does not constitute a taxable transaction within the meaning of VAT Act, cf. , PCS. 1, 1st and 2nd point.
- The legal basis
Of the VAT Act, section 4, subsection 1, 1st and 2nd point. appears:
“Tax is paid on goods and services provided for consideration in this country. By delivery of a good is meant the transfer of the right as the owner to dispose of a material good. (…)”.
The provision in the VAT Act, section 4, subsection 1, 1st sentence, implements Article 2 (1) of the VAT System Directive. 1 (a) (former Article 6 (1) of the 6th VAT Directive), which states:
“The following transactions are subject to VAT:
(a) the supply of goods for remuneration in the territory of a Member State by a taxable person acting in that capacity;
The concept of “supply of goods” is further defined in Section IV of the VAT System Directive, Taxable transactions, Chapter 1, Supply of goods.
The term “supply of goods” is defined in Article 14 of the VAT Systems Directive (formerly Article 5 of the 6th VAT Directive) as follows:
“Delivery of goods means the transfer of the right as the owner to dispose of a material good.
PCS. 2. In addition to the one in para. The transaction referred to in paragraph 1 shall be deemed to be the supply of goods:
(a) the transfer of ownership of a commodity against payment of a compensation indemnity under orders of the State or on its behalf or in accordance with the law;
(b) the actual transfer of an item under a contract relating to the letting of an item for a specified period or the sale of an item in installments, with the clause that, under normal circumstances, ownership is acquired at the latest upon payment of the last installment;
(c) the transfer of an item under a commission agreement for the purpose of purchase or sale.
… “.
- Applicable law
The following is stated in the Legal Guide, 2020-2, section DA4.2.4 Expropriation:
” Transfer of ownership of an item against payment of a compensation benefit in accordance with an order from the public or on its behalf or according to law is considered to be the delivery of an item for consideration. See ML § 4, subsection 3, no. 3, as inserted in the VAT Act by Act no. 1295 of 5 December 2019, § 4, and Article 14 (2) (a) of the VAT Systems Directive.
Prior to the amendment to Act no. 1295 of 5 December 2019, Article 14, para. 2, letter a, was not explicitly incorporated in section 4 of the VAT Act, but was implemented in Danish practice. For example. it appears from SKM2011.281.SR that the VAT Act’s rules on delivery for consideration must be interpreted in accordance with the directive. That is, expropriation of a real property against payment of compensation was considered to be a delivery of the property from the owner of the property to the construction authority, which falls within the scope of the VAT Act as defined in ML § 4, para. 1. See the preparatory work for Act no. 1295 of 5 December 2019, § 4. The same appeared – also before the amendment – of section DA4.1.4 . “
- SKM2021.84.LSRetc.
The case concerned whether a granted expropriation compensation for the disposal of the property located XX, for road widening in connection with the establishment of YY, was to be subject to VAT.
The National Tax Court found that the expropriation made against compensation did not constitute a taxable transaction within the meaning of the VAT Act, cf. section 4 (1) of the VAT Act. 1, 1st and 2nd point.
The National Tax Tribunal hereby refers to the fact that the European Court of Justice in C-665/16, Gmina Wroclaw has ruled that Article 14 (1) of the VAT Systems Directive In the light of its wording, Article 2 (2) (a) is a lex-specialist provision whose conditions of use have an independent character in relation to the conditions of use under Article 14 (2). And that the VAT Act does not have a provision that explicitly implements Article 14 (1) of the VAT Systems Directive. 2, letter a).
The National Tax noted that an administrative practice can not replace a correct implementation of Article 14 (1) of the VAT System Directive. 2, letter a), when this practice does not have coverage in the wording of the law.
The court finally noted that section 4 (1) of the VAT Act 3, no. 3, had not entered into force at the time of the binding answer, and that what was stated in the comments to Act no. 1295 of 5 December 2019 could not lead to a different result.
In addition to the decision in SKM2021.84.LSR , the National Tax Tribunal on 8 September 2020 also ruled in two other cases concerning binding answers, submitted by SKAT and on 2 November 2016, case no. 17-0006622, and on 17 September 2017, case no. 17-0992005.
The Ministry of Taxation has not brought the decisions before the courts.
- New practice
On the basis of SKM2021.84.LSR , the Danish Tax Agency is of the opinion that previous practice has been rejected. This means that expropriation – typically of real estate – against payment of a compensation can not be considered to constitute a delivery against payment of the property to the construction authority.
Thus, VAT must not be paid on expropriation compensation, cf., however, below.
By Act no. 1295 of 5 December 2019, Article 14 (1) of the VAT Systems Directive became 2, letter a, inserted in the VAT Act § 4, as a new paragraph. 3, no. 3, according to which the transfer of ownership of an item against payment of a compensation service in accordance with an order from the public or on its behalf or according to law constitutes a delivery for consideration.
The Amendment Act entered into force on 1 January 2020, cf. section 11 (1) of the Act. 1.
The change in practice as determined by SKM2021.84.LSR thus only has effect until the entry into force of the Amendment Act.
It is noted that the sale of real estate to an acquirer who, for the purpose of the acquisition, meets the conditions for expropriating the property, but where no expropriation of the property has been carried out, is not subject to resumption under this control signal.
- Resumption
6.1 Access to resumption
A resumption of VAT liability can be requested if previous Danish practice has been to the detriment of the company as a whole. This means that if resumption is requested, the request must cover all the tax periods for which resumption can take place. Resumption alone cannot be requested for selected periods. See SKM2015.733.SKAT on guidelines for repayment of amounts collected in violation of EU law.
If, in accordance with the Tax Administration Act, section 32, subsection 1, no. 1, the tax must be repaid, the Tax Administration has the right to make direct consequential changes to the refund for the same period. This means that in the claim for repayment, savings must be deducted in the form of deductions on purchase VAT, VAT on regulatory obligations and reimbursement of energy and environmental taxes.
It is a precondition for a refund of VAT that the company does not obtain an unjust enrichment by repaying it due to passing on the tax on the buyers of the real estate. This means the construction authority, which by expropriation has acquired land for public construction work.
When the compensation has been awarded to the landowner corresponding to the prices that can be ascertained in the market, ie the market value, and the compensation has been determined regardless of whether the landowner is a taxable person or a non-taxable person, it is the Tax Agency’s opinion that it wrongly charged and settled VAT in these cases is not passed on, and that repayment to the taxpayer will thus not lead to unjust enrichment, as the amount of compensation in these cases will be an expression of the full compensation under Article 73 of the Constitution.
In cases where the amount of compensation is subject to 25% VAT, taking into account the expropriation authority’s assessment of the market value and the fact that a typical buyer in the specific case would be able to obtain a VAT deduction or VAT refund / subsidy, the VAT will generally be passed on to the buyer. reimbursement to the company can therefore in principle not take place.
It is noted in this connection that regardless of the fact that the construction authority is a public authority that acts in this capacity, and therefore can obtain a subsidy or refund of VAT, this relationship can not be equated with a taxable buyer having a right to deduct, cf. 9. In the case of transfer in these cases, the VAT is in principle borne by the construction authority. Reference is made to SKM.2015.733. SKAT, section 3.1.2 on civil law claims raised by subsequent parties, and section 3.1.2.2 on limitation and interest.
6.1.1 Ordinary resumption
Pursuant to section 31 (1) of the Tax Administration Act. 2, ordinary resumption may take place if the request is made no later than 3 years after the expiry of the declaration deadline.
6.1.1.1 Extraordinary resumption
If the deadline in the Tax Administration Act, section 31, subsection 2, has expired, in accordance with the Tax Administration Act, section 32, subsection. 1, no. 1, upon request, extraordinary resumption in favor of the taxpayer for tax periods that coincide in whole or in part with the tax period that was under review in the first case, which resulted in the disapproval of practice, or the tax period that is wholly or partly coinciding with the tax period which has commenced but not yet expired, 3 years prior to the disapproval of practice.
When the practice has been finally rejected by a decision or judgment, and in that connection there is access to extraordinary resumption, cf. the Tax Administration Act, section 27, subsection. 1, no. 4, or the Tax Administration Act, section 32, subsection 1, no. 1, the 10-year limitation period in the Tax Administration Act, section 34a, subsection 4, from the time of the decision or judgment. Practice must be considered rejected by the National Tax Tribunal’s decision on 8 September 2020. The National Tax Tribunal’s decision relates to a binding answer submitted on 13 January 2014. The binding answer relates to the fact that the Expropriation Commission on 11 June 2013 had expropriated XX m 2 of the property. The questioner has accordingly charged and stated to SKAT 25% in VAT of the area compensation.
Therefore, if the conditions are met, extraordinary resumption can take place from the tax period that had begun but not yet ended on 11 June 2013.
6.2 Response deadline
Request for extraordinary resumption in accordance with the Tax Administration Act, section 32, subsection 1, no. 1, must be submitted in compliance with the provision in the Tax Administration Act, section 32, subsection. This means that the request for resumption must be submitted no later than 6 months after the taxpayer has become aware of the fact that justifies the deviation from the ordinary resumption deadline in section 31 (1) of the Tax Administration Act. 2.
The response deadline of 6 months is calculated from the publication of this control signal on the Danish Tax Agency’s website.
6.3 Resumption request
Requests for resumption must be submitted to the Danish Tax Agency via SKAT.dk or to the address: The Danish Tax Agency, Nykøbingvej 76, 4990 Sakskøbing.
The request must contain information about name, address and CVR number, as well as a specified statement of the claim for repayment.
- Tax consequences
The resumption of VAT liability may have tax consequences for the calculation of profit and loss on the expropriation of the property.
Refund of VAT relating to expropriation of real estate means that an adjustment must be made to the amount of compensation, and thereby a change in the profit and loss account.
If in connection with the expropriation a gain has been calculated that is tax-free according to section 11 of the Capital Gains Tax Act, the regulation will not have consequences, as further gains are also tax-free. The same applies to gains or losses that are tax-free according to the detached house rule in section 8 of the Capital Gains Tax Act or the farmhouse rule in section 9 of the same Act.
If a loss has been calculated in connection with the expropriation, the loss can be deducted from gains on real property in accordance with the rules in section 6 of the Property Gains Tax Act. The amended profit statement will mean that this loss is reduced or completely eliminated. However, if the loss is covered by the detached house rule in section 8 of the Capital Gains Tax Act or the farmhouse rule in section 9 of the same Act, the loss cannot be deducted from profits.
If the expropriation relates to real estate acquired as part of the owner’s business, profits are taxed in accordance with section 4 of the State Tax Act and losses are deductible in accordance with section 6 of the same Act. The adjustment of the compensation amount will therefore increase the taxable income.
If the refund of VAT exceptionally also includes buildings, and these have been depreciated, the adjustment of the compensation amount will result in a change in recovered depreciation, etc.
- Validity
The changed practice will be incorporated in the Legal Guide, 2022-1, section DA4.2 . Following the publication of the Legal Guide 2022-1, and the expiry of the response deadline in section 6, the control signal is canceled.
Source: skat.dk
