Partial demolition of a building – scrapping deduction denied
The Supreme Administrative Court (“SAC”), in its ruling on the 17th of March 2021 in case no. 4044-19, denied a company the right to a deduction of the tax residual value of a building owned by the company (scrapping deduction), as the building had not been completely or almost completely demolished.
A company owns a property on which there were four adjoining buildings. These buildings were by the company treated as one business unit and as a single building in the calculation of the annual tax depreciations. During an extensive development project on the property, substantial parts of the building were torn down. Some parts were completely demolished, while load bearing frame structures were retained in other parts. Approximately 44% of the building’s total area was demolished. After the demolition was completed, the company constructed residences and office spaces on the property. The partially demolished parts of the building were, after reinforcement, included in the new building.
The company claimed a scrapping deduction for the remaining part of the tax residual value of the building. The Swedish Tax Agency (“STA”) denied the company the deduction since parts of the previous building had been preserved. According to the STA, this entailed that the original building was not demolished, a prerequisite for an approved scrapping deduction. The Administrative Court in Stockholm and the Administrative Court of Appeal denied the company the claimed scrapping deduction.
In its appeal to the SAC, the company firstly claimed that they should be allowed a scrapping deduction corresponding to the remaining part of the tax residual value of the building and, secondly, that the company should be allowed a scrapping deduction corresponding to a percentage of the remaining part of the tax residual value of the building.
The SAC denied the company’s appeal and the scrapping deduction claimed.
The SAC states that a requirement for a scrapping deduction is that the demolition of a building implies that the building in the future cannot, or will not, be used in the owner’s businesses. Thus, a scrapping deduction requires that the building is completely or almost completely demolished.
The four buildings had by the company been handled as one common unit and approximately 56% of the existing building’s area was preserved. The non-demolished parts of the building were included in the new construction, which, according to the SAC, results in that a scrapping deduction cannot be made.
The ruling confirms the STA´s restrictive approach on when scrapping deductions can be allowed in the event of demolition. The grounds for the judgment do allow for a possibility to retain minor parts of a building in the event of demolition, yet, in our view, a complete demolition of the entire building will probably be required in most cases for an approved scrapping deduction.
It should be noted that in the case in question, an entire block of buildings was undisputedly considered to constitute a building. Furthermore, conditions allowing allocation of the tax residual value to the four separate building bodies were deemed to be lacking. When assessing future demolition works, it will be important to be able to show that the demolition of an individual building, or part of building, is complete. It will, in our view, be important that documentation that reliably identifies and substantiates the tax residual value of the building to be scrapped can be presented, in order to be able to successfully claim the scrapping reduction.
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