Provision to employees for compensation, VAT

Number: 8-1777607

1 Summary

Under certain conditions, a supply to an employee can be a turnover. In order for a supply to an employee to be turnover, there must be compensation from the employee that has a connection with this supply. A compensation can be invoiced to the employee in connection with the provision without affecting the employee’s salary. A salary deduction can also be such compensation that is connected to a provision. This applies to both gross salary deductions and net salary deductions.

When a taxable person conducts an economic activity and there are additional sales relating to transactions of a different nature than those normally included in the economic activity, the Tax Agency considers that an assessment must be made in the following steps.

1. Do these turnovers occur with such continuity and frequency that they could in themselves be an economic activity if no other economic activity is conducted?

If the answer is yes, then this is also included in the economic activity
If the answer is no, proceed to question 2.
2. Are these turnovers in any way related to the economic activity that they should be included in this?

Transactions of a different nature than those normally included in the business can, among other things, be sales to employees. The Swedish Tax Agency makes the assessment that when it comes to sales that occur regularly to employees, it is a question of economic activity in itself. These turnovers must then also be included in the financial activities. With regard to turnovers to employees that do not in themselves constitute an economic activity, the Tax Agency considers that a special assessment must be made as to whether the turnovers are to be considered to be related to the economic activity that is already being conducted.

If an employer sells taxable goods or services to the employee and these are part of the employer’s economic activities, there is a right to deduct input tax on purchases attributable to these sales.

When turnover has taken place between employer and employee and the remuneration is lower than the market value, the tax base must instead be calculated based on the market value. If a company provides the employees with the same type of goods or services that they also provide externally, there are normally comparable turnovers that can be used when assessing the market value. If the company has no external sales of the same type as provided to the employees, the compensation must normally be seen as market-based when it corresponds to or exceeds the costs the employer has had to be able to sell the goods or services to the employee.

The Tax Agency considers that older Swedish practice regarding the provision of home computers to employees (RÅ 1999 ref. 37, RÅ 1999 note 176 and RÅ 2004 ref. 112) should no longer be applied in view of newer practice from the EU Court of Justice (C-288/19 , Finanzamt Saarbrücken).

This position replaces “Home computers, state and municipality” dated August 17, 1998 no. 7115-98/900, “ Home services” dated November 20, 1998 no. 10326-98/900 , “Right to deduct input tax on acquisitions for employees’ private use – directly or through a staff foundation” dated 4 May 2001 dnr 5576-01/100 and “VAT on an employer’s sale of so-called home computers” dated 25 March 2002 dnr 2736-02/100 . The new view means that an employer’s supplies to employees will be taxed with an accompanying right of deduction in more cases compared to previous application.

2 Question

In case C-288/19, Finanzamt Saarbrücken, the Court of Justice of the EU has made statements which, according to the Tax Agency’s assessment, mean that the agency’s view of when it may be a question of provision to employees for compensation in an economic activity must be reviewed.

In this statement, the Swedish Tax Agency explains its view on the following questions.

When can a provision to an employee be considered to be made for remuneration, i.e. to be a turnover?
When should turnover to employees be considered part of the economic activity?
How is the right to deduct affected when a provision to an employee was made for compensation?
When should the compensation for provision to employees be reassessed?

The position statement does not deal with benefits etc. that the employer gives to the employee when these are provided free of charge. The position statement also does not deal with transactions relating to employers’ provision of cars to employees and operating costs for such cars, as this is dealt with separately in ML (see e.g. ch. 2 § 5 first paragraph 3, ch. 7 § 4 and ch. 8 § 15- 16 §§ ML). For such provisions, there will be no change compared to previous application.

3 Applicable law, etc

Value added tax must be paid to the state for such turnover within the country of goods or services that is taxable and is made by a taxable person in this capacity to the extent that the taxable person is not exempt from tax on the turnover (chapter 1 § 1 first paragraph 1 Value Added Tax Act [ 1994:200], ML, compare Article 2.1 a and ci Council Directive 2006/112/EC on a common system of value added tax, the VAT Directive).

3.1 Turnover

Turnover of a good exists when a good is handed over for compensation or when a good is claimed by withdrawal (ch. 2 § 1 first paragraph ML, compare article 14.1 of the VAT Directive).

Turnover of a service exists when a service is performed, handed over or otherwise provided to someone for compensation or when a service is claimed by withdrawal (Chapter 2 § 1 third paragraph ML, compare Article 24.1 of the VAT Directive).

There must be a direct connection between the service provided and the consideration received for a service to be deemed to have been provided. It is a question of such a direct connection if there is a legal relationship between the service provider and the recipient of the service which involves a mutual exchange of services. The remuneration received by the provider constitutes the actual consideration for the service provided to the recipient (C-94/19, San Domenico Vetraria, paragraph 21).

The compensation is the subjective value, i.e. what the seller actually receives in each concrete case, and not an estimated value determined according to objective criteria. The compensation must be able to be expressed in money (C-258/95 Julius Fillibeck Söhne paragraphs 13-14 and C-40/09 Astra Zeneca UK paragraphs 28-29).

When assessing the condition that rent must be paid, it is sufficient to state that the lack of such payment cannot be compensated by the fact that the use for private use of immovable property belonging to the business, with respect to income tax, is regarded as a quantifiable benefit in kind and thus as a part of the salary that the user waived in return for the immovable property made available. It has not been shown in the national cases that the salary of the company management has been reduced by a value corresponding to the immovable property made available or that the work effort of the company management can be considered in part as consideration (C-210/11 and C-211/11, Medicom and Maison Patrice Alard, paragraphs 28 and 30).

A direct connection can be concretized, in the relationship between an employer and his employee, through the part of the salary in cash that the employee must give up as compensation for the employer’s provision. In the interpretative question, reference has been made to a vehicle loan for which the employee does not make any payment and does not waive any part of his compensation in cash. The employee has also not chosen between different benefits offered by the taxable person in accordance with an agreement between the parties, according to which the right to use company vehicles means that other benefits must be given up. Such provision does not qualify as a provision of services for remuneration (C-288/19, Finanzamt Saarbrücken, paragraphs 30-32).

3.2 Economic activity

Taxable person refers to anyone who, regardless of location, independently conducts an economic activity, regardless of its purpose or results. Economic activity refers to any activity carried out by a producer, a trader or a service provider, including mining and agricultural activities as well as activities in free and equivalent professions. Exploitation of tangible or intangible assets with the aim of continuously gaining income from them must be considered in particular as economic activity (chapter 4 § 1 ML, compare article 9 of the VAT directive).

An activity is generally economic when it is continuous and is carried out for remuneration paid to the person who carried out the transaction (C-408/06, Götz, paragraph 18).

The concept of economic activity has an extensive field of application and the concept has an objective character in the sense that the activity must be assessed in itself, regardless of purpose and results. Taking into account the extensive scope of VAT, a company that normally carries out economic activity must be considered to be carrying out economic activity also for the part that refers to the provision of coupons to its employees in return for them renouncing part of their salary in cash (C-40/09, Astra Zeneca UK, paragraphs 23-24).

3.3 Right of deduction

The person who is liable for tax has the right to deduct input tax on acquisitions or imports for the activity that entails tax liability (Chapter 8 § 3 ML, compare Article 168 of the VAT Directive).

A buyer must act as a taxable person when he makes his purchase in order to be entitled to a deduction for input tax. Furthermore, the purchase must be intended to be used in the buyer’s economic activity (C-97/90 Lennartz paragraph 8 and C-118/11 Eon Asett Menidjument paragraphs 57 and 69).

In order for the right of deduction to exist, it is required that there is a direct and immediate connection between a certain incoming transaction and one or more outgoing transactions. The right to deduct input tax thus assumes that the costs of the acquisition are part of the cost components of the outgoing taxed transactions that give the right to a deduction. When there is no direct and immediate connection between a certain incoming transaction and one or more outgoing transactions for which there is a right of deduction, there may still be a right of deduction if the costs are part of the general overheads of the taxable person. This is the case when it forms part of the cost components included in the price of the goods or services it provides (C-132/16, Iberdrola, paragraphs 28-29).

Deductions can be denied for input tax on the purchase of goods or services that are intended to be provided without compensation or are intended for activities other than the economic activity that the taxable person carries out. This applies under the condition that the goods designated as fixed assets are not included in the assets of the business (C-118/11 Eon Asett Menidjument point 74).

A company’s purchase of home computers for employees’ private use against salary deductions has been considered part of the salary benefits and not in any way a provision for compensation in a professional activity. Deductions could therefore not be made for the input tax (RÅ 1999 ref. 37, RÅ 1999 note 176 and RÅ 2004 ref. 112).

3.4 Revaluation

The tax base must be calculated based on the market value if

the compensation is lower than the market value
the buyer has no right of deduction
the seller and the buyer are connected to each other
the seller cannot make it likely that the compensation is market-based (Chapter 7, Section 3 a, Section 3 b and Section 3 d, second paragraph, compare Article 80 of the VAT Directive).

By market value is understood the entire amount that the buyer, in the same sales stage as the one where the transaction takes place, at the time of the transaction and in free competition would have to pay to an independent seller. If no such comparable turnover can be determined, the market value constitutes,

in the case of goods, of an amount not less than the purchase price of the goods or of similar goods or, in the absence of a purchase price, the cost price of the goods at the time of transactions or,
in the case of services, of an amount that does not fall below the taxable person’s cost of performing the service (Chapter 1 § 9 ML, compare Article 72 of the VAT Directive).

The purpose of the rules is to counteract tax evasion through the pricing of transactions or to prevent a loss of value added tax revenue for the state as a result of the price being manipulated in transactions between related parties (prop. 2007/08:25 pp. 116 and 124).

A company and its employees must be seen as connected to each other. No revaluation of the tax base shall be made in case of underpriced transactions if the compensation is market-based. In the event that an employer gives customary discounts to its employees, it may be considered a matter of remuneration that is market-based (prop. 2007/08:25 p. 135 f.).

The expression market-based price reduction refers to a reduction in the price that can be considered commercial and thus beneficial for the business being conducted (HFD 2014 ref. 40).

The tax basis for the provision of subsidized staff meals to the employees of a restaurant company has been considered to be the remuneration paid by the employees. Regardless of whether the compensation was below the market value or not, in the current case the compensation for the staff meals that corresponded to or exceeded the company’s costs for the services was considered market-based (RÅ 2010 ref. 76).

4 Assessment

4.1 Turnover

For it to be a turnover, there must be a legal relationship of exchange of mutual performance. There must be a direct connection between the good or service provided and the compensation received by the seller.

Even a supply to an employee can be turnover. In order for it to be a turnover, however, there must be compensation from the employee who has a connection with this provision. Such compensation can be invoiced to the employee in connection with the provision without affecting the employee’s salary.

A salary deduction can also be such compensation that is connected to a provision. This applies to both gross salary deductions and net salary deductions.

However, the mere fact that the employer’s provision can be seen as a taxable benefit for income tax purposes does not mean that there is such compensation.

4.2 Economic activity

A taxable person conducts a single economic activity that consists of all taxable transactions that he carries out. The economic activity also includes transactions that are not in themselves taxable, e.g. transactions without compensation, if the transaction has a connection with the economic activity. Taxable transactions here refer to sales, i.e. supplies for consideration.

1. Do these turnovers occur with such continuity and frequency that they could in themselves be an economic activity if no other economic activity is conducted?

If the answer is yes, then this is also included in the economic activity
If the answer is no, proceed to question 2.

2. Are these turnovers in any way related to the economic activity that they should be included in this?

Transactions of a different nature than those normally included in the business can, among other things, be sales to employees. In the case of turnover to employees, it must therefore initially be determined whether the company’s turnover to employees takes place with such continuity and frequency that they could in themselves be an economic activity. If this is the case, these turnovers are also included in the economic activity. An example can be mentioned when an employer provides its employees with cleaning services on an ongoing basis for compensation.

The Swedish Tax Agency makes the assessment that when it comes to sales that occur regularly to employees, it is a question of economic activity in itself. These turnovers must then also be included in the financial activities.

With regard to turnover to employees where the scope does not in itself constitute an economic activity, the Swedish Tax Agency considers that a special examination must be made as to whether the turnover should be considered to be related to the economic activity that is already being conducted.

Occasional sales to employees that relate to transactions that are normally part of the company’s financial operations, e.g. cleaning services in a cleaning company, must be included in the economic activity as these may be considered to be related to the same.

A company that has a fixed asset that is normally used in the business can lease this asset to its employees. Even if the letting to the employees takes place to such a limited extent that the letting is not in itself an economic activity, the Tax Agency considers that such letting should be included in the economic activity because there is a connection with the existing economic activity.

It happens that a company buys assets that are not to be used in the business, but these assets are to be sold directly to the employees and the sales take place to such a limited extent that the sales are not in themselves economic activities. The Swedish Tax Agency considers that these should not be included in the economic activity because the sales have no connection with this.

In the Swedish Tax Agency’s view, it is the companies that have the burden of proof that there is a sufficient connection between individual sales to employees and the existing economic activity.

4.3 Right of deduction

The right to deduct input tax may be assessed on the basis of whether the costs, either directly or as general overheads, can be attributed to an economic activity that is itself taxable.

There is therefore no right to deduct input tax if an employer acquires goods or services for an employee’s private use. The same applies if the employer’s turnover to the employee cannot be considered part of the economic activity.

If an employer sells taxable goods or services to the employee and these are included in the employer’s economic activities, there is, on the other hand, a right to deduct input tax on purchases attributed to these sales.

4.4 Revaluation

When turnover has taken place between employer and employee and the remuneration is lower than the market value, the tax base must instead be calculated based on the market value. Only when the employer can make it probable that the compensation is market-based can the employer avoid the tax base being calculated based on the market value.

Market value is the amount that the employee would have had to pay to an independent seller within the country for a comparable turnover. If there is no comparable turnover of goods or services, the market value is the employer’s cost of providing the goods or services.

If a company provides the employees with the same type of goods or services that they also provide externally, there are normally comparable turnovers that can be used when assessing the market value. In the event that the employer gives customary discounts to its employees, it may be considered a matter of compensation that is market-based, which means that no revaluation is relevant. If the compensation is less than what can be considered a customary discount, revaluation must be done to the market value.

If the company has no external sales of the same type as provided to the employees, the compensation must normally be seen as market-based when it corresponds to or exceeds the costs the employer has had to be able to sell the goods or services to the employee.

4.5 Examples

4.5.1 Electric bicycles for employees

An IT company offers its employees access to an electric bicycle for a monthly gross salary deduction. The company leases the e-bikes from another company to the extent that the employees take advantage of the offer. The gross salary deduction is SEK 500 per month and corresponds to the cost of SEK 500, including VAT, that the company has to lease the bikes.

The gross salary deduction is a compensation for the right to use the electric bicycle, i.e. the company provides a service to the employees.

Even if only one of the employees takes advantage of the offer, it is still a question of sales with such continuity and frequency that they are in themselves economic activities. It is a question of a continuous agreement, which means that the employee continuously gets access to the electric bicycle for a fee.

The company has the right to deduct the input tax attributable to the leasing of the electric bicycle.

Since the company does not have any rental of electric bicycles to other than the employees, the compensation can be considered market-based as it corresponds to the costs the employer has incurred for leasing the bicycles. It will therefore not be relevant to reassess the tax base. Calculation of the tax base is therefore based on compensation for the service, i.e. from the gross salary deduction.

4.5.2 Parking spaces for employees

An employer, an IT company, rents parking spaces that are used for parking employees’ private cars. The employer pays SEK 2,000, including VAT, in monthly rent per parking space to a parking company. The employer makes a net salary deduction of SEK 1,500 per month for the employees who have signed up to use the places.

The net salary deduction is compensation for the provision of the parking space, i.e. the company provides a service to the employees.

The sales take place with such continuity and frequency that they could in themselves be an economic activity. The employer must therefore report output tax for the provision of parking spaces to employees. In return, the employer has the right to deduct input tax on the rent of the parking spaces from the parking company.

The employer rents and sublets the parking spaces without the addition of any services. A comparable turnover in the turnover stage between the employer and the employee should therefore be the amount that the company paid for its purchase, i.e. because it is the amount the employee would normally have had to pay for a purchase from an independent seller. When calculating the market value, the net salary deduction may be considered to include value added tax. The net salary deduction amounts to SEK 1,500/month, which means that the compensation falls short of the market value by SEK 2,000. Nor can it be market-based to charge a price that is lower than the purchase price when the service is directly consumed by the employee. Grounds for revaluation therefore exist. The employer must therefore report output tax of 20 percent of the market value of SEK 2,000 per parking space.

4.5.3 Not economic activity

A company runs an economic activity in the form of a grocery store. On one occasion, the company buys in a cleaning service for SEK 2,000 (including VAT) for an employee’s co-owner’s private home. The employee pays SEK 1,000 as a net salary deduction for the cleaning.

Since the turnover of the cleaning service takes place on a single occasion, it is not a question of turnover with such continuity and frequency that it is in itself an economic activity.

A special assessment must be made of whether the turnover is to be considered to be related to the economic activity that is already being carried out. It is the company that has the burden of proof to show that there is a sufficient connection between the single turnover to the employee and the existing economic activity. Normally, there is no such connection between food sales and cleaning services. In that case, this means that the company has no right to a deduction for the input tax on the purchase of the cleaning service.

4.6 This statement replaces previous statements

This position replaces “Home computers, state and municipality” dated August 17, 1998 no. 7115-98/900, “Home services” dated November 20, 1998 no. 10326-98/900, “Right to deduct input tax on acquisitions for employees’ private use – directly or through a staff foundation” dated 4 May 2001 dnr 5576-01/100 and “VAT on an employer’s sale of so-called home computers” dated 25 March 2002 dnr 2736-02/100. The new view means that an employer’s supplies to employees will be taxed with an accompanying right of deduction in more cases compared to previous application.

Source: skatteverket.se