PwC wins landmark case enabling public authorities to reclaim additional input VAT

Tobias Meier Kern
Director Tax & Legal Services, PwC Switzerland

PwC has won a landmark case before the Federal Court for its client, a community in the Canton of Zurich. This decision will enable public authorities to reclaim input VAT on some investments in the past as well as in the future.

Background

A community had already recharged building costs from the real estate department to other departments in the community, as well as to third parties. When it built a new town hall for its administration, it chose to opt for VAT for these recharges to other departments of the community and to third parties. The real estate department then recovered the full input VAT on the construction costs and the running costs of the new town hall.

In the course of an audit, the FTA denied the input VAT reclaim based on its practice that a department which is financed through taxes may not recover input VAT on investments. The reason for this – according to the FTA – is that the transfer of the money from the department that collects the taxes to, in this case, the real estate department, constitutes a subsidy, which according to Art. 33 para 2 of the VAT Act leads to a reduction of the right to recover input VAT for the party receiving the subsidy.

The Federal Court has now declared this practice to be void and not in line with the law. In particular, the Federal Court has stated that a flow of funds within a public authority cannot constitute a subsidy and therefore cannot lead to a reduction of the right to recover input VAT.

What should you do?

Any community, canton or city etc which has previously incurred input VAT on investments which were used to generate taxable income (e.g. buildings rented out with VAT) can now file a claim with the FTA to recover the input VAT. If you have any questions or otherwise require support, please contact your usual PwC contact or Jeannine Haiböck or Olivier Comment.

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