The German Federal Fiscal Court (BFH) recently ruled (judgment of 17 April 2024 – XI R 13/21) on grants for local public transport (ÖPNV), stating that at least state grants are not subject to VAT (see KMLZ VAT Newsletter 37 | 2024). The decisive factor for the German Federal Fiscal Court was the fact that the grant was paid for structural policy reasons. The ruling was a milestone: the municipality was allowed to keep the full grant and did not have to pay VAT to the tax office. The input VAT deduction was not reduced either. While in the past grants were often classified as subject to VAT or at least as reducing input VAT, the German Federal Fiscal Court (BFH) ruled that there are indeed so-called genuine (non-taxable) grants and that grants do not necessarily have a negative impact on the input VAT ratio. 

 

We have been eagerly following the ECJ proceedings in case C-615/23 concerning a Polish public transport case and have been wondering whether the ECJ comes to the same conclusion as the BFH.

 

The case concerns a typical situation in the field of public passenger transport. The Polish passenger transport company, P, operated local public transport. The tickets were sold at a price set by the responsible authority (local authority) that did not cover costs. The local authority was compensated for the resulting loss by means of a loss compensation payment (grant). Under VAT law, it was disputed whether the compensation payment was subject to VAT as consideration from a third party.

 

 

The ECJ came to the conclusion that grants, in the form of compensation payments, do not constitute consideration from a third party within the meaning of Article 73 of the VAT Directive and therefore do not increase the taxable amount. This provision is only applicable if (1) the subsidy is directly linked to the price of the supply in question. In the Court's view, this is only the case if the subsidy is paid to the subsidised economic operator (in this instance, P) precisely for the provision of a specific supply. Only in this case can the subsidy be regarded as remuneration and thus be subject to VAT. Furthermore, (2) the payment of the subsidy must objectively enable the economic operator to provide the supply at a lower price than it would have to charge without the subsidy. Finally, (3) the remuneration embodied in the subsidy must be determinable.

 

The ECJ concluded that the compensation payment did not directly affect the price set by the municipality. The purpose of the compensation payment was primarily to cover P's losses. The price of the tickets was set independently of the compensation payment and the compensation was not linked to specific transport services. Rather, the subsidy was based on the number of kilometres covered by the vehicles. It is irrelevant that the price of the tickets could be reduced due to the compensation payment. According to the ECJ, the same applies to any subsidy. The crucial factor was that the passengers benefiting from the subsidy could not be clearly identified. The subsidy was calculated without considering the intensity and number of users of the service provided. 

 

And if one closely examines the ECJ's findings, along with the opinion of Advocate General Kokott of 13 February 2025, it also becomes clear that the flat-rate payment cannot be understood as consideration for a supply rendered by P to the grantor.

 

We now have a little more legal certainty on the subject of grants. Now also from the ECJ, which upholds the German Federal Fiscal Court's ruling. The conclusion: Loss compensation (in retrospect) is much better than agreeing on a grant in advance. We also note that the more general the grant agreement, the better it is for VAT. The less reference made in the grant agreement to the specific costs or the object of the grant, the better. Many politicians will now breathe a sigh of relief, especially in the public transport sector. The federal and state governments will not collect their share of VAT. The full grant will therefore remain with the recipient. Conversely, if the agreement is intelligently structured, the tax authorities will have to contribute to the investment costs via input VAT deduction. It is worthwhile to critically assess all grant agreements and to structure them in a legally compliant and optimal manner regarding VAT.