VAT and subsidies
As we have seen on a number of occasions in the past, the VAT treatment given to subsidies has long been a controversial issue.
Over recent months, the Catalan tax administration has carried out a number of inspections in public transport companies and other undertakings in the culture sector which could potentially result in regularizations of considerable amounts.
Such action has been based, in our opinion, on the interpretation made of an EU judgement which gave rise to a legislative change which became effective in 2015 and backed an administrative criterion with major tax-raising implications. According to this criterion, VAT is required to be charged and paid in on subsidies received by these entities since they must be included as part of the tax base corresponding to the services (given that these subsidies are linked directly to the price).
The controversy may nevertheless have been settled thanks to steps taken by the sectors affected. The new Public Sector Contracts Law published in the Official State Gazette on October 9, 2017 includes a final provision which amends the provisions of the VAT Law in this respect and implies a complete U-turn with regard to the interpretation which the Administration had adopted since 2015.
Under the new rules, cash contributions made by public administrations in order to finance (i) the management of public services or cultural promotion and (ii) activities of general interest when the recipients are non-identifiable and no price is paid (public televisions and research centers) are excluded from the concept of grants linked to price. While the legislature’s wish is clearly to settle this question for the future, stipulating that there is to be no VAT paid in in relation to such contributions, the main question facing us now is how this legislative change will affect past situations. Since the recent change has not resulted from a change in interpretation brought about by case law, at EU or domestic level, the understanding is that the purpose of this amendment is to clarify the position, meaning that it should also be applicable to situations arising in the past.
It appears unlikely, however, that this will be the criterion adopted by the tax management and inspection teams pertaining to the State Tax Agency.
In short, the debate relating to the VAT treatment of subsidies has yet to run its full course.
Senior Associate of the Garrigues Tax Department