The Ramme Gård-case - Hr-2022-2404-A


Metallic abstract pattern
In the period of 2012 to 2020, a large construction project was carried out on the property Ramme Gård in Vestby, Norway. Existing buildings were extended, and two new buildings were built to house hotel operations and an art exhibition. The tax office concluded that the company was not entitled to deduct costs for construction and input VAT for the period of 2012 to 2016. According to the tax office, the investments were so extensive that the activity did not have profit potential within the foreseeable future. The District Court concluded that the decision made by the tax office was invalid, in contrast to the Borgarting Court of Appeal and the Supreme Court.

The judgement of the Supreme Court can be summarized in the following key points:

  1. Whether the right to deduct costs and input VAT requires that the commercial activity has profit potential, and the content of a such condition.
  2. Whether it is up to the tax office to speculate whether a commercial activity has profit potential.

The Supreme Court concluded that profit potential in the foreseeable future is a condition for deduction under the Norwegian Tax Act section 6-1 (1) and the VAT Act section 8-1. There must be a reasonable possibility of making profit, which implies that the activity can go into deficit and still meet the requirement of profit potential. Hence, the assessment of whether there is profit potential must be future oriented. An important clarification by the Supreme Court is that, in addition to make a surplus, the business must also provide a reasonable return on the capital invested in the business.

Furthermore, the requirement of profit potential draws the line between commercial activities that are deductible, and other activities that do not entail to deduction. The Supreme Court emphasize that in addition to hobby activities, activities that have similar features to regular commercial activity but where the activity can not give a reasonable profit within a foreseeable future, both fall outside the tax system.

The supreme court did also consider at what extent the tax authorities can reassess one's own assessments regarding profit potential. In case where objective evidence indicates that the activity has profit potential, the Supreme Court clarifies that the taxpayer has a wide margin of appreciation. This will also apply to those struggling financially and to entrepreneurial activity in an initial phase. Thus, it is stated that there must be room to innovate ideas even though there may be little chance of success. The core of the judgement seems to be whether the activity has a reasonable potential for profit making.

It must be considered that the Ramme Gård-case is atypical, which the Supreme Court itself clarifies. For ordinary commercial activity, including industries in downturns or entrepreneurial activity, tax offices and courts probably will be reluctant in reviewing the assessments regarding profit potential done by the businesses. The Supreme Court did also emphasize that museums and other activities that depend on public subsidies to be profitable, still could considered business activities.

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