Insights
INTERNATIONAL TAX
Grants from a Regional Authority
Recently the Court of Justice of the European Union (CJEU) dealt with the question of how grants from a regional authority to cover losses for a company providing public passenger transport services are to be classified for VAT purposes.
A Polish joint‑stock company intended, on the basis of contracts with a regional authority, to offer passenger transport services, with the authority setting the ticket prices under the agreement. As the revenue from ticket sales was not cost‑covering, the contract (flat‑rate) provided for compensation payments by the regional authority as loss coverage. The Polish joint‑stock company applied to the tax office for clarification as to whether the compensation payments form part of the VAT taxable base and are therefore subject to VAT. In the procedural chain, the highest Polish administrative court referred the question to the CJEU for a preliminary ruling.
Compensation payment not part of the VAT taxable base
The CJEU concluded that the compensation payment from the regional authority to the joint‑stock company is not part of the VAT taxable base, because the compensation was not linked to the ticket price and had no direct impact on the pricing of the transport services. The authority’s payment was not granted for a specific service to individual customers, but covered the losses of the joint‑stock company arising from the provision of the services, irrespective of their use by particular users. According to the CJEU, an indirect influence on price by the subsidy alone is insufficient to create a direct link between fare and subsidy.
Conclusion
When companies receive subsidies from regional authorities, it is relevant for VAT classification whether those payments are directly linked to a service provided by the company. A flat‑rate compensation payment made solely to cover losses is generally not subject to VAT. However, due to the complexity of the underlying facts and the potentially far‑reaching consequences of an incorrect classification, public grants should always be examined in detail for their specific VAT liability.
Compensation payment not part of the VAT taxable base
The CJEU concluded that the compensation payment from the regional authority to the joint‑stock company is not part of the VAT taxable base, because the compensation was not linked to the ticket price and had no direct impact on the pricing of the transport services. The authority’s payment was not granted for a specific service to individual customers, but covered the losses of the joint‑stock company arising from the provision of the services, irrespective of their use by particular users. According to the CJEU, an indirect influence on price by the subsidy alone is insufficient to create a direct link between fare and subsidy.
Conclusion
When companies receive subsidies from regional authorities, it is relevant for VAT classification whether those payments are directly linked to a service provided by the company. A flat‑rate compensation payment made solely to cover losses is generally not subject to VAT. However, due to the complexity of the underlying facts and the potentially far‑reaching consequences of an incorrect classification, public grants should always be examined in detail for their specific VAT liability.