Ruling regarding turnover-based deduction of input vat

by Maria Ström and Ebba Perman Borg


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The Swedish Supreme Administrative Court has decided that the Swedish rules on so-called mixed business, under which the deductible amount must be calculated on a reasonable basis, is incompatible with EU law.

Where a taxable person performs transactions for which VAT is deductible, as well as transactions in respect of which VAT is not deductible (in Swedish law, so-called mixed business), the VAT directive (Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax) (the “Directive”) provides that only the proportion of VAT attributable to the taxable transactions is deductible. Under the Directive, the main rule is to calculate the deductible input VAT based on the turnover-based method, but it is permitted for member states to implement exemptions provided that the method used guarantees a more precise determination of the deductible proportion than that arising from application of the turnover-based method. The European Court of Justice has further held that member states must apply optional exemptions though an explicit national provision.

The main question in the judgement was whether it is compatible with EU law to not allow a taxable person to use the turnover-based method and instead calculate deductible input VAT using one of the exemption methods. The Swedish Supreme Administrative Court (“HFD”) stated that the Swedish VAT Act (1994:200) which was applicable at the time of the transactions at hand, did make it possible to allocate the deducible proportion of the input VAT using any of the methods set out in the Directive. However, the provision did not explicitly state that the turnover-based method shall be used as a main rule, nor did it specify for which transactions another method must or may be used. HFD did therefore not consider the Swedish provision to implement the EU regulation in an acceptable manner.

In the absence of a Swedish provision implementing an exemption to the turnover-based method, HFD deemed that there was no basis for applying another method against the company's will. Given that the Directive has direct effect, HFD stated that the company may calculate the deductible proportion of input VAT by applying the turnover-based method.

It may be noted that a new VAT Act entered into force on 1 July 2023, and that the judgement was based on the old VAT Act (1994:200). Given that the new VAT Act (2023:200) does not provide for a material change in this regard, the judgement should be relevant also for the new VAT Act.

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