Hannes Snellman Counsel to Several Landlords Defeating Finnish Tax Authorities’ Attempt to Deny VAT Deductions on the basis of Tenant’s Bankruptcy

5 February 2018

Hannes Snellman’s tax, litigation, and insolvency teams collaborated to assist several Finnish landlords in a case where Finnish tax authorities tried to claw back VAT deductions on real estate investments due to the tenant’s bankruptcy. The case relates to a more general transformation of retail business where traditional retail stores are struggling due to the emergence of e-commerce.

The case originated when a large traditional Finnish retail store chain went bankrupt. According to the Finnish VAT Act, a bankruptcy estate is able to realise the residual inventories of the bankrupt company without adding VAT to the sales price of the goods. If the bankruptcy estate chooses to do this, it has to repay the VAT deducted on the purchase of inventories. In this case, the bankruptcy estate had decided to repay the VAT deducted on the purchases of the inventories instead of adding VAT to the sales prices. This decision led the bankruptcy estate also to deem that it is not liable to add VAT to the compensation that it pays to the landlords of the retail premises. The bankruptcy estate considered this possible despite the fact that according to the lease agreements, the lease was subject to VAT since the bankruptcy estate did not commit to the original lease agreements on behalf of the debtor company. Furthermore, according to the Act on Commercial Leases, a bankruptcy estate is entitled to use the premises for a while against compensation without committing to the original lease agreement between the debtor company and the landlord.

The Finnish tax authorities deemed that since the bankruptcy estate was paying the compensation to the landlords without VAT, the premises had been taken into use that is not subject to VAT. Hence, the landlords would be liable to retroactively repay the VAT deducted on investments made to these premises from the past 10 years.   

Hannes Snellman assisted the landlords in their defence against the above-mentioned claims by the tax authorities. By combination of in-depth knowledge of both insolvency law and tax law, our team prepared a solid argumentation that – since the landlords were obligated by the law and the general principles of loyalty between contract parties to let the bankruptcy estate to continue to use the retail premises without a lease agreement for the duration of the realisation of inventories – it did not have relevance to the VAT status of the landlords that the bankruptcy estate did not add VAT to the compensation paid in accordance with the Act on Commercial Leases. The Administrative Court ruled in favour of this argumentation and decided that the use of the premises by the bankruptcy estate on the basis of law, not a contract, for the duration of the realisation of inventories, was more comparable to the premises being vacant than to a situation where the premises would have been leased for non-VAT use. In accordance with this decision, our clients are not liable to repay the substantial VAT claw back amounts demanded by the tax authorities. The tax authorities also claimed that the bankruptcy of the tenant would cause all VAT on expenses related to the premises and paid by the landlord to be non-deductible until a new tenant carrying out VAT-liable business is found for the premises. These claims were similarly found without merit and overruled by the court.  

The team included Heikki VesikansaPetri SaukkoMika Karppinen, and Matleena PälveThe decision by the Administrative Court can still be appealed to the Supreme Administrative Court if the Supreme Administrative Court grants a leave of appeal.