EU VAT Treatment of Subsidies: ECJ Case C-615/23, Rules & Key Compliance Tips

Subsidies, grants, funding, or other types of financial assistance by governments or other public authorities are supporting mechanisms that play a pivotal role in the economic landscape of the EU countries, influencing various sectors from agriculture to transportation. 

Applicable VAT rules to these subsidies hinge on their specific characteristics and the nature of the related transactions. Therefore, sometimes it is hard to determine if certain subsidies are subject to VAT, which requires a deep analysis on a case-by-case basis.

To bring this matter closer and help better understand certain key principles, this article will cover the ECJ's previous case law, key articles from the EU VAT Directive, and the steps subsidies recipients should consider to determine the applicable VAT rules.

Overview of EU VAT Rules for Subsidies

The EU VAT system, governed by the EU VAT Directive, provides a general insight into how subsidies are treated from the VAT perspective. Article 73 of the EU VAT Directive specifies that the taxable amount for the supply of goods and services includes everything constituting consideration or fee received or to be received by the supplier in return for the supply, including subsidies directly linked to the supply price.​

In other words, if a subsidy is directly connected to the price of a specific good or service, it becomes part of the taxable amount and is subject to VAT. On the other hand, if a subsidy is not tied to a specific transaction, it is typically excluded from the taxable amount.

Nevertheless, under Article 173 of the EU VAT Directive, EU countries may include these subsidies not directly linked to the supply price in the denominator when calculating the deductible proportion of input VAT, which affects the amount of VAT a business can reclaim.

EU Case Law and Opinion in ECJ Case C-615/23

EU case law, primarily the ECJ rulings, has continually shaped the interpretation of EU rules and regulations, including subsidies. In its previous rulings, such as cases C-353/00 and C-21/20, the ECJ underlined that to determine if a subsidy is subject to VAT, there must be a difference between a general or global subsidy, paid to cover general operation costs, and a subsidy granted to enable a third party, such as a customer, to obtain a specific service or good more cheaply.

For example, in case C-353/00, the ECJ determined that a subsidy paid by the national agency to Keeping Newcastle Warm was received by the latter in return for the service it supplied to the householders. Therefore, the subsidy was subject to VAT. 

Contrary to this, in case C-21/20, a Bulgarian national public television broadcaster received a government subsidy, whereas the television viewers did not pay any fees for the broadcasting service. However, the ECJ ruled that since there was no direct connection between the broadcasting services and the subsidy, the activity of national television did not constitute a service provided for a fee. Consequently, the subsidy was not subject to VAT.

In the latest ECJ case regarding the VAT treatment of subsidies, the Advocate General provided his opinion on the subject matter. The ECJ case C-615/23 centers on the treatment of subsidies made by local authorities to public transport operators to cover their financial losses. The main question is whether such ex-post subsidies, calculated based on vehicle-kilometers rather than the number of users, should be considered as a fee for services provided, thus falling within the scope of VAT.

The Advocate General argued that such subsidies do not form part of the fee for a service supply and are only intended to cover the transport operators' financial losses. Therefore, the subsidy is not directly linked to the transportation service price. Based on these facts, the subsidy falls outside the scope of VAT. Nevertheless, the final ECJ ruling may differ from the Advocate General's opinion.

Practical Implications for Organizations

Businesses and other organizations, such as non-profit organisations, receiving any form of subsidies should consider the purpose and nature of the subsidy when determining whether it falls within the scope of VAT. Therefore, the primary consideration is whether the subsidy is directly linked to a specific supply, meaning whether it is directly related to the price of goods or services or intended for general support.

If a subsidy is an integral part of the end customer's price of goods or services, it may be deemed a fee and, therefore, subject to VAT. Conversely, general subsidies supporting operational costs without a direct link to prices fall outside VAT's scope.

Payment conditionality, price influence, beneficiary, and funding intent are several indicators to consider when evaluating the nature of subsidy payment. Furthermore, if the national Tax Authorities do not provide helpful guidelines, organizations receiving subsidies should contact the competent authority and ask for an opinion or look for relevant court rulings.

Conclusion

Determining the VAT implications of grants or subsidies within the EU requires a thorough analysis of each subsidy’s nature and purpose. The key is deciding whether the subsidy is general or linked to the price of goods or services.

Depending on the outcome of the subsidy evaluation, it may be included in the taxable amount and subject to VAT or fall outside the scope of VAT. The analysis's results may have a profound impact on organizations, such as non-profit organizations, from a financial and administrative point of view, primarily if the organization must fulfill VAT obligations.

Source: Case C‑615/23 - Opinion of Advocate General Kokott, EU VAT Directive, Deloitte, EY, HMRC