Norway: Supreme Court Rules on Right to Deduct Input VAT for Mixed Businesses

Last Updated: 14 October 2005
Article by Marianne Brockmann Bugge
  • Right to Deduct Input VAT
  • Hotel Businesses
  • Established Administrative Practice
  • Supreme Court Decision
  • Comment

A recent Supreme Court ruling confirmed the right to deduct input value added tax (VAT) for 'mixed' businesses - that is, businesses with both activities subject to VAT and activities exempt from VAT.

The June 30 2005 ruling states that, as long as an acquisition of or investment in goods and services is relevant and has a natural and sufficiently close connection to activities subject to VAT, the business is entitled to deduct a proportional part of the input VAT on the acquisition or investment. It is the second time the court has explicitly disregarded a long-established practice by the VAT authorities to accept deduction of input VAT only on acquisitions made principally for use in the VAT-liable part of the business.

Right to Deduct Input VAT

According to Section 21 of the VAT Act, a business liable for VAT and thus registered for VAT purposes in Norway can deduct input VAT on goods and services acquired for use in its VAT-liable activities. Where a business carries out both activities subject to VAT and activities exempt from VAT (mixed businesses), Section 23 of the act establishes that a proportional part of the input VAT may be deducted. The right to deduct a proportional part is further regulated in Regulation 18 of December 20 1969.

Hotel Businesses

The case at hand dealt with the right of the lessor of a building to deduct input VAT when renting the building to a hotel business.

Selling and renting real estate property falls, in principle, outside the scope of VAT. However, the lessor may opt for VAT registration if it is renting the building (or part of it) to a business that is using the property (or part of it) for a business liable to VAT. If the lessor opts for such registration, it is required to charge (output) VAT on the rent. On the other hand, it is allowed to deduct input VAT on costs related to the rental activities subject to VAT.

As for the business of renting real estate, renting hotel rooms falls outside the scope of VAT. However, running a restaurant and/or conference centre is in general an activity subject to VAT. Similarly, services such as telecommunications, internet access, pay television and minibar sales are subject to VAT.

Therefore, a hotel business will normally be subject to VAT for certain services and obliged to register, calculate and pay VAT on these activities. According to the act, this should also entitle the business to a corresponding right to deduct input VAT.

Established Administrative Practice

The right to deduct input VAT is undisputed where an acquisition is made solely for use in activities subject to VAT (ie, where a hotel business invests in restaurant furniture, telephones and televisions for the rooms, or minibars). On the other hand, if any of these investments are considered to be used in a VAT-exempt part of a business (eg, as part of the activity of renting hotel rooms), the business must deduct the input VAT proportionally to the use.

The VAT authorities have, for a substantial period of time, maintained the view that the act should be interpreted in such a way that businesses with both activities exempt from VAT and activities subject to VAT can deduct input VAT only on acquisitions made principally for use in activities subject to VAT. In other words, if goods and/or services are considered to have been acquired mainly for use in activities exempt from VAT, the authorities claimed that the business could not deduct the input VAT (not even proportionally). This principle applied even where the goods and/or services were acquired and at least partially used in activities subject to VAT.

Supreme Court Decision

In the case at hand, the VAT authorities had, in accordance with their administrative practice, denied a business renting a hotel building deduction of a proportional part of the input VAT on construction costs for the hotel building. The company claimed that the building costs for the rooms were relevant not only to the accommodation (which was exempt from VAT), but also to activities subject to VAT (eg, telecommunications services, pay television or minibar sales) and should thus be deductible of a proportional part of the VAT.

The city court sustained the lessors' claim but was overruled by the court of appeal. The court of appeal held that the connection between the activities subject to VAT and the activities exempt from VAT was too incidental and loose to allow any deduction of VAT.

However, the Supreme Court found that the company was entitled to a proportional deduction of input VAT. According to the ruling, VAT law does not presuppose that an acquisition must be mainly for use in activities subject to VAT if VAT is to be deducted on the acquisition. The court found that hotel rooms are relevant input factors for the VAT-liable activities that actually take place in the rooms. The court thus held that the law expressly gives businesses a corresponding right to deduct input VAT related to these VAT-liable activities.

Comment

The ruling by the Supreme Court is the second in a short period that emphasizes businesses' right to deduct input VAT related to VAT-liable activities, irrespective of whether the cost is also related to VAT-exempt activities. Furthermore, the ruling strongly rejects the administrative practice considering the 'principal use' of acquisitions that has been unlawfully maintained over the years.

The ruling is relevant not only for hotel businesses, but also for all businesses involving both VAT-liable and VAT-exempt activities. Such mixed businesses should reconsider their future and past VAT accounts. However, to date the Ministry of Finance has maintained that most claims concerning previous years would be barred under the statute of limitations.

The general VAT rate in Norway is 25%. Therefore, VAT costs may be considerable for businesses that cannot deduct it. Consequently, many companies are considering the consequences of the ruling for their own business. For instance, a number of businesses arranging sports events (which are exempt from VAT) and also supplying advertising services in connection with the events (which are subject to VAT) have recently filed claims against the VAT authorities. Since a sports stadium and other sport constructions are relevant to the advertising business, it was alleged that a proportional part of the input VAT is deductible. Following the Supreme Court ruling, these businesses seem to have been proven right. However, the real impact of the ruling still remains to be seen.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions