Subsidies and VAT tax
The turnover tax practice is regularly confronted with the phenomenon of “subsidies”. When income is received under the heading of subsidy, interesting questions arise with regard to the levying of turnover tax, also known as value added tax (VAT) (* 1). Reason enough to dedicate a blog to this topic.
First of all, the question arises whether subsidy funds received by an entrepreneur are subject to the levy of turnover tax (* 2). Your gut feeling may say that subsidies should not be taxed with VAT because they are often provided from idealistic motives. From a VAT perspective, however, it is decisive whether the subsidy provision can be regarded as compensation for the services provided by the subsidy recipient. If this is the case, then there is a taxable subsidy. Untaxed subsidies are not considered as compensation for an activity because they are not directly related to a taxable (taxable or exempt) taxable person’s taxable income.
It is the variety of subsidy types (* 3) that makes the question raised above often difficult to answer. In national and European fiscal jurisprudence this issue has therefore been discussed several times. Despite this stream of jurisprudence, it appears that the VAT qualification of subsidies remains a difficult affair in some situations.
In fact, when assessing the taxability of a grant, the “three-stage rocket” is mentioned below:
1. Is the subsidized company regarded as an entrepreneur within the meaning of turnover tax?
2. Is the received subsidy directly related to the performance of the subsidy recipient?
3. Does the activity of the subsidized lead to the consumption of this performance by the subsidy provider or an identifiable third party?
If these three questions must all be answered in the affirmative, then it can be concluded that there is a taxable subsidy for VAT.
Subsidies are often untaxed for VAT. However, if the subsidy constitutes compensation for a benefit, VAT may be due on it. The Tax and Customs Administration increasingly checks for subsidies.
Impact on the right to deduct VAT?
In addition to the discussion about the taxability of subsidy receipts, the VAT country has been struggling for years with the question whether the receipt of a subsidy affects the right to deduct input tax. With input tax we mean the VAT that entrepreneurs will be charged by other entrepreneurs in respect of deliveries 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 the turnover tax (non-economic activities) cannot be deducted. In addition, when costs are incurred for exempted services, the input tax that is levied on them is not eligible for deduction. There is therefore only the right to deduct input tax in so far 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 economic operator carries out economic activities consisting of both taxable and exempted services, there is only a right to deduct the VAT on the costs attributable to its taxable benefits (pro rata right of deduction). Activities that a recipient of a subsidy funds with a VAT-unencumbered subsidy without receiving other allowances for this may be of an economic nature. They are then labeled as a non-economic activity. The question then arises whether, and to what extent, the receipt of an non-taxable subsidy influences the right to deduct input VAT from 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) relates to the non-economic activities, we are confronted with a problem for which European (* 4) and national legislation (* 5 ) no solution is provided. In order to determine the right of deduction of the entrepreneur, in those cases a division 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 problems of the “pre pro rata”. A complicated term, with an equally complex elaboration. It therefore goes too far to explain this system here. What you need to keep in mind is that the receipt of an non- taxable subsidy can have adverse consequences for the right to deduct the VAT charged to the subsidy recipient by other traders in respect of purchased deliveries or services.
Summary, and what do I give you?
The problem regarding the VAT treatment of subsidies is therefore twofold. On the one hand, the question is to what extent subsidies are subject to the levying of VAT. On the other hand, it is unclear whether and to what extent the receipt of a subsidy affects the right to deduct input tax from an entrepreneur.
Subsidies are often untaxed for VAT. However, if the subsidy constitutes compensation for a benefit, VAT may be due on it. The Tax and Customs Administration increasingly checks for subsidies. A tendency is noticeable in which the Tax Authorities more readily assert that there is a VAT-taxable allowance and therefore postpone VAT. In order not to create unpleasant surprises, it is advisable to assess the subsidy on its VAT merits before or during the subsidy application. Any VAT risk can then be signaled in time.
Entrepreneurs will normally be pleased if they ultimately succeed in loosening subsidy funds from the government. However, if the Tax Authorities subsequently take the view that the subsidy is the equivalent for a non-economic activity, this happiness will partly be blurred if it appears that the receipt of the subsidy has a restrictive effect on the right to deduct input tax. . The subsidy seems to have passed its target, because the intended financial advantage disappears like snow in the sun. The VAT that cannot be deducted is a cost item for the subsidized entrepreneur.
If this is the case, the towel should not be thrown into the ring in advance. The fact that there are no clear rules for determining the right of deduction of an entrepreneur who performs both economic and non-economic activities, offers possibilities that a VAT specialist can rely on. It is quite possible that the subsidy recipient, in agreement with the tax authorities about his right to deduct, then still wins the boxing round!
W.B. Bouwman, MSc.
Employed as a VAT specialist at BDO Accountants & Belastingadviseurs B.V. in Rotterdam.
1: In this publication the names VAT and sales tax are used interchangeably.
2: De facto, it is first necessary to assess whether the monetary provision qualifies as a subsidy at all. For the sake of simplicity, I leave out this review in this publication.
3: The following types of subsidies are often recognized for tax purposes: the operating subsidy, the budget subsidy, the price subsidy and the consumption subsidy.
4: Directive 2006/112 / EC (VAT Directive)
5: Dutch Law on turnover tax 1968
Do you have any questions? Please contact us.