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.


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.

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