Recently, we have seen an increasing interest of the tax authorities in the abuse of law. The Municipal Court in Prague (Ref. No. 3 Af 20/2021-43) recently examined one such case of abuse of law in connection with the application of the right to deduct value-added tax. The judgment concerns the distinction between accommodation services and rental of immovable property with implications for the application of VAT deduction. What position did the court take on the issue?
Background of the case
In the present case, the court considered a business chain whose formal purpose was the provision of accommodation services – the key factor being that it was supposed to be a taxable supply giving rise to a right to deduct VAT. The company owned a number of residential units which were leased to another company (later subletting to another company which provided the residential units to its employees under an accommodation contract). As the provision of accommodation services is a taxable supply, the various links in the chain successively claimed the VAT deduction.
However, during the tax proceedings, the tax administrator had doubts about whether the chain in question was actually providing accommodation services or whether it was providing a lease of immovable property. If the chain was a rental of immovable property, the right to deduct VAT would not arise.
According to the court, was it a matter of leasing immovable property?
The court interpreted the term “lease” as a transfer of the right to use the property as if the lessee were the owner – for an agreed period of time and for consideration. The lease is also a ‘relatively passive’ activity, which distinguishes it from other transactions, such as the provision of accommodation services (which, on the contrary, are regarded as comprehensive services). In the present case, it was found that there was no reception in the buildings, no cleaning or ancillary services were provided, and no accommodation capacity fee was paid. There was also accommodation for former employees. All of this led to the conclusion that the actual content of the legal transaction in question was the provision of a lease of immovable property for the purpose of obtaining a tax advantage in the form of a VAT deduction.
What else did the court address?
The court also had to consider whether there had been an abuse of law. In view of the above, the court held that the “two-step test” (introduced by the Halifax judgment) had been met and that the entire conduct could therefore be regarded as an abuse of law.
How did the court rule?
The right to deduct VAT was withdrawn as a result of the application of the concept of abuse of law. Recent case law shows that the concept of abuse of law is being increasingly applied by the tax authorities, and further tax audits on this issue can be expected.