VAT Treatment of EU-Funded Projects for Non-Profit Associations

The dispute between the Latvian Information and Communication Technology Association (the Association) and the State Tax Authority highlights the question of when a non-profit organisation crosses the line into economic activity under EU VAT law. At the center of this case are two EU-funded training projects managed by the Association but primarily delivered through subcontractors and co-financed by the European Regional Development Fund (ERDF).

The case examines the intersection of EU VAT law, non-profit activity, and the administration of public subsidies, clarifying whether and when an association’s intermediary role transforms it into an economic operator for VAT purposes.

Background of the Case 

In 2016, the Latvian Association entered into two contracts with the Central Finance and Contracting Agency (CFLA) to implement ERDF-financed training projects. There were two projects, one for ICT professionals and another for micro and small enterprises (MSEs).

Regarding the first project, developed for ICT professionals, the Association provided recipients with training costs, plus VAT, and, in some cases, management fees of 5% or 10% of the funds received from the CFLA. The Association appointed trainers to deliver courses, covered their expenses, including VAT, and declared the VAT as input tax. Once the training or course was finished, the Association reimbursed recipients with funds from the CFLA, covering a portion of the training costs, and invoiced recipients for the management fees.

For the second project, designed for MSEs, the Association covered all the training providers' fees, including VAT, under contracts involving the recipients, who agreed to co-finance 30% of the total payment. The ERDF provided 70% of the payment through the CFLA. This meant that the Association managed payments and VAT handling, ensuring that funding and co-financing obligations were met while delivering the training services.

Following the tax audit, the Latvian Tax Authority challenged the Association’s entitlement to deduct input VAT. The Tax Authority issued eight decisions to the Association between 2019 and 2021, requesting that it pay EUR 87,299.37 in VAT for the period from January to October 2018, along with a fine of EUR 611.96 and late-payment penalties of EUR 7,707.52. Additionally, the Tax Authority declined the Association’s requests for refunds of excess VAT for various months in 2018 and 2019, totaling EUR 101,363.24.

The primary reason for this was the Tax Authority's conclusion that the ICT and MSE projects could only be implemented by an association or a public authority, rather than an economic operator. Since the Association had no profit-making purpose and did not provide the training services itself, its activities did not constitute an economic activity. Consequently, the Association could not be entitled to deduct input VAT.

In contrast to this, the Association held that its legal status as an association did not affect its VAT rights, that it was registered as a taxable person in Latvia, and that, through the ICT and MSE projects, it acted as an intermediary providing training services, which should entitle it to deduct input VAT. Therefore, the Association challenged the Tax Authorities' conclusion and decision before the District Administrative Court.

The District Administrative Court annulled the challenged decisions and ruled in favour of the Association. However, the Tax Authority appealed against the annulment before the Regional Administrative Court, which consolidated all the related cases. Due to its uncertainty about how to interpret EU-wide VAT rules, it requested a preliminary ruling from the European Court of Justice (ECJ).

Main Questions from Request For Ruling

The Regional Administrative Court raised three questions before the ECJ. The first one was whether a not-for-profit or non-profit organisation implementing projects financed by the ERDF should be regarded as a taxable person carrying out an economic activity under Article 9(1) of the EU VAT Directive.

The second question concerns whether, under the EU VAT Directive, specifically Article 28, an association that does not directly supply training services can still be considered a supplier when it acquires those services from another economic operator to implement an ERDF-financed project.

And finally, the Regional Administrative Court sought to determine whether the taxable amount for a service is the total sum received from both the service recipient and a third-party fund payment, when the recipient pays only part of the service cost and the remainder is covered by ERDF funding.

Applicable EU VAT Directive Article

The ECJ identified five articles from the EU VAT Directive as the most relevant, three of which were directly referenced in the questions. These key articles for this case were Articles 2(1), 9(1), 28, 73, and 132(1). 

Articles 9(1), 28, and 73 were part of the question referred to the ECJ. They define a taxable person, underline that when they act in their own name but on behalf of another, participating in the supply of services, they are considered to have received and supplied those services themselves, and establish that the taxable amount for the supply of goods or services includes all consideration obtained or to be obtained from the customer or a third party, including subsidies directly linked to the price of the supply, respectively.

Articles 2(1) and 132(1) were not a part of the questions. Still, since they establish that VAT applies to the supply of services for consideration or a fee within an EU country when made by a taxable person acting as such, and define exemption from VAT for certain transactions, including vocational training or retraining services, as well as closely related goods, when supplied by public-law bodies with that purpose or by other organisations recognized by the EU country as having similar objectives, these provision were crucial for the case.

Latvia National VAT Rules

Regarding the Latvian national rules, the ECJ noted that the Law on Value Added Tax of 29 November 2012 transposes the EU VAT Directive into Latvian law, and that Articles 2(1) and 7(1) of the Law on Associations and Foundations were the most relevant ones for this case.

Importance of the Case for Taxable Persons

The interpretations and analyses of the ECJ provide taxable persons with clear guidance on how EU VAT rules treat non-profit organisations that act as intermediaries in delivering services funded or co-financed by public subsidies.

The findings and conclusions stated in the ruling may have significant financial and tax implications for associations, foundations, and other non-profit organisations involved in public projects, particularly those co-financed by EU funds, as it addresses their entitlement to deduct input VAT on costs incurred in implementing such projects.

Analysis of the Court Findings

At the beginning of the analysis of the case, the ECJ determined that it would be more suitable to address the second question first, as its answer may clarify whether subsidies, such as those paid by the ERDF through the CFLA, are included in the taxable amount for the services supplied by the Association under the ICT and MSE projects. Depending on the answer to that question, the first question regarding economic activity will be considered afterwards.

The ECJ proceeded to the second question, stating that it is for the Regional Administrative Court to assess the factual nature of the transactions in the main proceedings. Nevertheless, the ECJ will guide the interpretation of EU regulations to assist in resolving the case.

According to established case law, a supply of services is taxable only if there is a direct link between the services provided and the fee received by the taxable person. The required link exists when the provider and recipient have a reciprocal legal relationship, and the payment received by the provider constitutes an actual fee for the services supplied to that recipient.

Notably, and in accordance with Article 73, it is not required that the payment come directly from the recipient of the services, and the payment of the fee may come from a third party. Also, the fact that the price paid differs from the cost or market value is irrelevant when determining whether a transaction is for a fee or not. The primary reason for such an interpretation is that it does not affect the direct link between the service supplied and the fee received, which is established in advance according to precise criteria.

The ECJ concluded that, in the ICT project, two service relationships exist. The first one is between the recipient and the Association, where the recipient pays the full price and later receives a partial refund from the CFLA grant. The second one is between the Association and the subcontracted training company, for which the Association pays for services. It is from this structure that it is apparent that the Association is considered the supplier of the training services to the recipients, regardless of its use of subcontractors instead of its own staff.

In other words, the Association acted in its own name and on its own behalf by invoicing the training recipients for the cost of the training. In contrast, the training company worked on behalf of the Association, providing the services that the Association then paid for.

For the MSE project, ECJ added, there is a slight difference from the ICT project. In this case, a contract exists between the Association and a subcontractor for the provision of training. However, the relationship with the training recipients is governed by a separate tripartite agreement between the Association, the training company, and each recipient. 

The ECJ concluded that, when implementing this project, the Association provided the training services in its own name and on its own behalf through a subcontractor, as the subcontractor did not act on its own behalf. Therefore, Article 28 does not apply in this case.

The final ECJ remark on the second question was that the fact that the financing for the training services primarily comes from the CFLA, which itself received the funds from the ERDF, does not prevent the services from being classified as supplied for a fee, since, under established case-law, a fee can come from a third party. The fact that the funds fully cover the Association’s costs without generating a profit, consistent with its non-profit status, does not prevent the services from being regarded as supplied for a fee.

Moving to the third question, the ECJ analysis was short and to the point. It stated that, based on established case law and the facts of the case, the answer is affirmative.

After providing answers to the second and third questions, ECJ circled back to the first question. In the very beginning of the analysis of this question, the ECJ noted that, subject to the referring court’s factual assessment, the supply of training services meets the criteria for a supply of services for consideration, that is, for a fee, under Article 2(1)(c), which is a necessary condition for economic activity. 

The ECJ further added that the fact that a business may engage in commercial activities only on an ancillary basis does not prevent the activity from being considered an economic activity if it aims to obtain income continuously. Additionally, the substantial financing of the training courses by ERDF does not affect whether the Association’s activity is economic, because the concept of economic activity is assessed objectively, regardless of the operator’s source of funding, including public subsidies.

Lastly, the ECJ highlighted that determining economic activity requires a case-by-case examination of all circumstances, comparing the conduct to that of a typical active business in the relevant field. In this case, the Association must be compared to an organisation that arranges and provides training services.

Courts Final Decision

The ECJ ruled that, under the EU VAT Directive provisions, the supply of training services invoiced by a non-profit association constitutes a supply of services for consideration or for a fee, and that Article 28 does not apply in the absence of an explicit agency agreement establishing that a taxable person supplied the services in their own name on behalf of another.

The subsidies paid to a service provider by a European fund for a specific supply of services are included in the taxable amount as consideration or a fee obtained from a third party. And, finally, the non-profit status of an association does not prevent it from being regarded as a taxable person carrying out an economic activity, provided that, when all circumstances are considered, the activity meets the objective criteria of economic activity.

Conclusion

The ECJ provided a critical clarity for non-profit organisations acting as intermediaries in EU-funded projects, and underlined that non-profit status does not prevent an association from being considered a taxable person under EU VAT law, provided that it carries out activities that meet the objective criteria of economic activity.

An additional takeaway from this case is that services supplied through subcontractors, even if funded primarily by public subsidies such as ERDF grants, can constitute a supply of services for consideration or a fee, which brings significant VAT obligations for those engaged in such projects and activities.

Source: Case C‑87/23 - Latvian Information and Communication Technology Association v State Tax Authority, EU VAT Directive, VATabout