On October 16 2023, the Swedish Supreme Administrative Court (HFD) delivered a landmark decision in the case of Volkswagen Finans Sverige AB (HFD 2023 ref. 45). This judgment significantly impacts the application of VAT apportionment rules in Sweden for businesses engaged in both VAT-able and VAT-exempt activities. Following the ruling, the Swedish Tax Agency (Skatteverket) issued new guidance on handling VAT apportionment.
Background to the Volkswagen Finans Sverige AB case
Volkswagen Finans Sverige AB operates VAT-able activities (car sales and leasing) and VAT-exempt activities (insurance and financing). The dispute centred on how the company should apportion its input VAT on costs incurred for these mixed activities.
The court addressed whether Sweden's VAT apportionment rules in Chapter 8, Section 13 of the former Swedish VAT Act, which allows apportionment based on a "reasonable basis", were in line with articles 173.1 and 174 of the EU VAT Directive. The court found that Sweden had not correctly transposed these provisions into national law. The apportionment rules remained unchanged in the new revised VAT Code.
The key points of the HFD decision are as follows:
Turnover-based apportionment – the HFD confirmed that under Article 174 of the VAT Directive, businesses must primarily apportion input VAT based on turnover from taxable activities, unless a more precise method is available. Turnover-based apportionment should be the default method.
Swedish legislation misalignment – the Swedish VAT Act only specifies that input VAT apportionment should be conducted on a “reasonable basis”, without clearly prioritising turnover as the main method. The provision lacked the clarity, precision, and legal certainty required for businesses to understand their VAT obligations.
Direct effect of EU law – articles 173.1 and 174 have direct effect in Sweden, allowing businesses to rely directly on these provisions to apply the turnover method for apportionment even in the absence of national transposition. This meant that Volkswagen Finans Sverige AB could calculate a higher percentage of its input VAT as deductible using the turnover method, substantially increasing its VAT recovery.
Skatteverket’s restrictive interpretation
In response to the HFD ruling, Skatteverket released a position paper in February 2024 clarifying the application of VAT apportionment post HFD 2023 ref. 45. While acknowledging the direct effect of the VAT Directive, the agency imposed several limitations:
Restricted use of the turnover method – Skatteverket allowed the turnover-based method but limited its use to cases where no other method provides a more precise reflection of how resources are used in taxable and exempt activities. Businesses cannot automatically default to the turnover method. Other methods, such as sectorised or usage-based approaches, may still be preferred by Skatteverket.
Exclusion of residential property – Skatteverket emphasised that the turnover-based method cannot be used for costs related to goods or services that are subject to a VAT deduction restriction under Swedish law. This affects residential property, which is classified as a "permanent dwelling" and subject to an input VAT deduction ban.
Standstill clause – Skatteverket maintained that the restriction is permissible under Article 176 of the VAT Directive (the ‘standstill clause’), which allows the country to maintain pre-existing VAT deduction restrictions. These limitations, especially the exclusion of residential property, restrict the application of the turnover method for businesses involved in real estate.
Practical application: Case 10348-24
The impact of the HFD ruling is already evident in lower-court cases, such as case 10348-24, decided by the Stockholm Administrative Court. This case involved a housing cooperative (Brf Stureparken 2) that sought to apply the turnover method for VAT apportionment. The court sided with the cooperative, rejecting Skatteverket’s argument for a different method based on floor space. This case illustrates how Swedish courts are now aligning their decisions with the EU-mandated turnover-based method.
Implications for businesses
The HFD ruling and Skatteverket’s subsequent guidance have significant implications for businesses in Sweden, especially those operating in sectors with mixed taxable and VAT-exempt activities. Key considerations include the following:
Reassessing VAT apportionment methods – businesses can now rely on the turnover method for VAT apportionment but must assess whether this method accurately reflects how resources are used. In cases where the turnover method is inappropriate, alternatives such as sectorised or usage-based methods may still be required.
Awareness of national restrictions – while the turnover method is more widely available, businesses must remain aware of national VAT deduction restrictions, particularly those related to residential property. Skatteverket's continued emphasis on the standstill clause means that businesses cannot recover input VAT for costs associated with permanent dwellings, even if these costs are partly linked to taxable activities.
Potential for litigation – businesses are likely to continue challenging Skatteverket's restrictive interpretations. Companies should be prepared for potential disputes over VAT deduction rights and may need to seek legal advice to navigate both EU law and Swedish regulations.
Implications of the ruling for Swedish VAT law
The HFD 2023 ref. 45 ruling marks a significant shift in Swedish VAT law, bringing it closer to the EU principles on VAT apportionment. While businesses now are explicitly entitledto use the turnover method, Skatteverket’s restrictive interpretation and ongoing national deduction restrictions create a complex landscape. Careful planning and paying attention to EU law and national regulations are essential for businesses seeking to optimise their VAT recovery in mixed-use operations.
