The prohibition of deductions of input VAT relating to permanent dwellings - A standstill legislation in motion?

The area of VAT constitutes an area fully harmonized within the EU, and the framework for the European VAT is established in the VAT Directive and is implemented in Sweden through the Swedish VAT Act. The European VAT is a general tax on consumption with the purpose of only taxing purchases for personal consumption. However, the European VAT cover all stages of production and distribution. To achieve the goal, to only tax private consumption, traders are relieved of the burden of the tax since they are allowed for deductions of input VAT incurred in the business. Therefore, the deduction mechanism is regarded as the essence of the VAT system. The ECJ has also stressed in several of its cases that the right to deduct is an integral part of the VAT system which ensures the neutrality of the tax which must apply in the same manner in all Member States. Derogations from the fundamental right of deduction are only allowed when expressly permitted in the VAT Directive and must be interpreted strictly. According to the first subparagraph of Article 176 of the VAT Directive, the Member States were allowed to retain exclusions from the right to deduct input VAT on certain expenditure which was in force under their national provisions, at the time of its accession the EU. The second subparagraph of Article 176 contains a standstill clause prohibiting the Member States from amending their national laws with the effect of extending the scope of retained exclusions. The objective of this thesis is to examine if the prohibition of deductions of input VAT relating to permanent dwellings in Chapter 8. Section 9 first subparagraph point one of the Swedish VAT Act is in conformity with the VAT Directive, a prohibition which is covered by the standstill clause in the second subparagraph of Article 176. In order to achieve this objective, this thesis begins with examining Article 176 including related case law. This thesis continues by examining the prohibition of deductions of input VAT relating to permanent dwellings and the interpretation of the concept of permanent dwellings by the HFD. This thesis finds that the prohibition of deductions of input VAT relating to permanent dwellings is in breach of Article 176 since the HFD have been inclined to interpret the concept of permanent dwellings extensively. Not only is the prohibition in breach of the VAT Directive, but the concept of permanent dwellings is also deviating from concepts developed by the ECJ