Subsidies in VAT
The sales tax practice is regularly confronted with the phenomenon of “subsidies”. When income under the heading of subsidy is received, interesting questions arise with regard to the composition of turnover tax, also known as value-added tax (VAT) (* 1). This is reason enough to dedicate a blog to this topic.
First of all, the question arises whether subsidies received by an entrepreneur are subject to sales tax (* 2). Your gut feeling may say that subsidies should not be taxed with VAT, because they are often provided for idealistic reasons. From a VAT point of view, however, the decisive factor is whether the granting of subsidies can be regarded as compensation for services provided by the subsidy recipient. If this is the case, this is a taxable subsidy. Taxable subsidies are not regarded as compensation for an activity because they are not directly related to a taxable benefit (taxed or exempt) from a taxable person.
It is the variety of grant types (* 3) that makes the question raised above often difficult to answer. This issue has therefore been discussed several times in national and European tax case law. Despite this stream of case law, it appears that the VAT qualification of subsidies remains a difficult issue in some situations.
In fact, the assessment of the taxability of a subsidy refers to the following “three-stage rocket”:
Is the subsidized classified as an entrepreneur within the meaning of turnover tax?
Is the grant received directly related to the performance of the grant recipient?
Does the activity of the subsidized result in the consumption of this service by the grant provider or an identifiable third party?
If all three questions need to be answered in the affirmative, it can be concluded that there is a taxable subsidy for VAT.
Subsidies are often tax-exempt from VAT. However, if the grant is the fee for a service, VAT may be due. The Tax and Customs Administration increasingly checks for subsidies. ~ Benny Bouwman
Influence on the right to deduct VAT?
In addition to the discussion about the taxability of subsidy receipts, the VAT country has long struggled with the question of whether the receipt of a subsidy affects the right to deduct input tax. By input tax, we mean the VAT that entrepreneurs are charged by other entrepreneurs in respect of supplies or services rendered to them. In principle, the right to deduct input tax has two limits. First of all, the VAT on costs incurred for transactions that fall outside the scope of turnover tax (non-economic activities) cannot be deducted. In addition, if costs are incurred for exempt services, the input tax on them is not eligible for deduction. Henceforth that there’s only a right to deduct input tax insofar as the goods and services in respect of which VAT has been charged are used by an entrepreneur for taxed economic activities.
However, if a subsidized entrepreneur performs economic activities consisting of both taxed and exempt services, there is only a right to deduct VAT on costs that are attributable to his taxed services (pro-rata deduction). Activities that a subsidy recipient pays with a VAT-taxable subsidy without receiving any other compensation for this may lack an economic character. They are then labeled as a non-economic activity.
The question then arises whether, and to what extent, the receipt of a tax-free subsidy influences the right to deduct the input tax of this subsidized entrepreneur. However, asking that question is easier than answering it.
When an entrepreneur incurs costs that are not fully attributable to his economic activities, but also (partly) relate to the non-economic activities, we are confronted with a problem for which European (* 4) and national legislation (* 5) ) no solution can be provided. In such cases, in order to determine the entrepreneur’s right to deduct, a split of the input tax must be made between the economic and non-economic transactions to which they relate. We then get bogged down in the fog-covered problem of the “pre pro-rata”. A complicated term, with an equally complex elaboration. What you should keep in mind is that receiving a tax-exempt subsidy may have an adverse effect on the right to deduct the VAT charged to the subsidy recipient by other entrepreneurs in respect of purchased supplies or services.
Summary, and what do I give you?
The problem of the VAT treatment of subsidies is therefore twofold. On the one hand, the question is to what extent subsidies are subject to VAT. On the other hand, it is unclear whether and to what extent the receipt of a subsidy affects the entrepreneur’s right to deduct input tax.
Subsidies are often tax-exempt from VAT. However, if the grant is the fee for a service, VAT may be due. The Tax and Customs Administration increasingly checks for subsidies. Often, situations have happened in which the Tax and Customs Administration takes the position more quickly that there is a VAT taxable reimbursement and therefore has VAT. In order not to be faced with unpleasant surprises, it is advisable to assess the subsidy on its VAT merits before or during the subsidy application. A possible VAT risk can then be identified in time.
Entrepreneurs will normally be delighted if they eventually succeed in securing subsidies from the government. However, if the Tax and Customs Administration subsequently takes the view that the subsidy is the equivalent of a non-economic activity, this joy will partly fade if it appears that the receipt of the subsidy has a limiting effect on the right to deduct input tax. The subsidy then seems to miss its target, because the intended financial benefit disappears like snow in the sun. After all, the VAT that cannot be deducted constitutes a cost item for the subsidized entrepreneur.
If this is the case, however, the towel should not be thrown in advance. The fact that there are no clear rules available to determine the deductible right of an entrepreneur who carries out both economic and non-economic activities offers opportunities that a VAT specialist can take advantage of. It is quite possible that the subsidy recipient will get out of the ring in coordination with the tax authorities regarding his right to deduct!
W.B. Bouwman, MSc.
Working as a VAT specialist at BDO Accountants & Belastingadviseurs B.V. in Rotterdam.
In this publication, the terms VAT and sales tax are used interchangeably
De facto, it remains to be assessed whether the financial provision qualifies as a subsidy at all. For the sake of simplicity, I will not consider this review in this publication
For tax purposes, the following types of subsidy are usually recognized: the operating subsidy, the budget subsidy, the price subsidy and the consumption subsidy
Directive 2006/112 / EC (VAT directive)
Dutch Sales Tax Act 1968