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A recent ruling by the Swedish Tax Court has clarified the VAT treatment of business asset transfers, particularly in cases where the recipient entity engages solely in tax-exempt activities.
In Advance Notice No. 76-24/I, the court evaluated whether a planned transfer of brokerage operations from a parent company to its wholly owned subsidiary would qualify as a supply of goods or services under Chapter 5, Section 38 of the Swedish Tax Code often referred to in EU contexts as the VAT Act.
Case Overview
The taxpayer in question is the sole owner of a subsidiary. Currently, the parent company conducts entirely tax-exempt brokerage activities, meaning it is not entitled to deduct input VAT on purchases related to that activity. As part of a broader corporate restructuring, the parent planned to transfer the full scope of its brokerage business to the subsidiary, after which the parent would operate exclusively as a holding company, retaining only ownership of the subsidiary’s shares.
The main question before the court was whether this transfer could be considered VAT-exempt as a transfer of a business asset under Chapter 5, Section 38 of the Tax Code.
Key Findings from the Court
After reviewing the case, the court acknowledged that:
The planned transfer qualified as a business asset transfer under Section 38.
- The legal structure and substance of the transaction mirrored what is typically accepted as a transfer of a going concern (TOGC) in VAT law.
However, the court ultimately ruled that Section 38 would not apply, and the transfer would not be exempt from VAT. The reasons:
- The Subsidiary Only Performs Tax-Exempt Activities
The subsidiary, like the parent, conducts only tax-exempt operations. This means it has no right to deduct input VAT, a central condition for VAT neutrality in such transactions. - No Entitlement to VAT Deduction
Because neither party in the transaction can recover input VAT, the transfer doesn’t meet the underlying policy objective of Section 38 to prevent VAT distortion or double taxation during genuine business transfers. - Transfer Does Not Qualify as VAT-Exempt
In light of the above, the transaction falls outside the scope of the exemption, and VAT must be charged on the transfer.
Implications for Businesses in Sweden and the EU
This decision reminds Swedish and EU businesses that VAT exemptions on business asset transfers are not automatic, especially when the entities involved are VAT-exempt or non-deductible.
The ruling reinforces a key VAT principle: eligibility for input VAT recovery is a decisive factor when determining whether a transfer of business assets qualifies for exemption under Swedish law and EU VAT directives.
Companies undergoing restructuring, mergers, or asset realignments, particularly those in sectors like financial services, education, or healthcare where VAT-exempt status is common, should carefully assess the VAT implications of such transfers. Without proper planning, what might seem like a tax-neutral restructuring could result in unexpected VAT liabilities.
Next Steps for Businesses
Advisors and tax professionals should take note of this ruling and consider the following:
- Review any intra-group transfers involving tax-exempt entities.
- Ensure that restructuring plans include an analysis of input VAT eligibility.
- Seek advance rulings or guidance in ambiguous cases.
The Swedish Tax Court’s decision sets a precedent, setting a more transparent framework for future disputes involving VAT treatment of asset transfers. As regulatory environments tighten across the EU, compliance and clarity in VAT planning remain critical for avoiding unnecessary costs.
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