Flashback on ECJ cases C-184/00 (Office des produits wallons) – Subsidies covering a part of the operating costs of a taxable person are liable to tax if directly linked to a specific economic activity

On November 22, 2001, the ECJ issued its decision in the case C-184/00 (Office des produits wallons).

Context: Sixth VAT Directive – Article 11A(1)(a) – Taxable amount – Subsidies directly linked to the price.

Article in the EU VAT Directive

Article 11(A)(1)(a) of the Sicth VAT Directive (Article 73 of the EU VAT Directive 2006/112/EC)

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Facts
The OPW is a private non-profit-making association which carries out the advertising and sale of Walloon agricultural and horticultural products and agricultural foodstuffs, an activity in respect of which it is subject to VAT. It enjoys an annual subsidy from the Walloon Region, with which it concluded a framework subsidy agreement on 11 March 1994 (”the framework agreement”). Under that agreement, it is responsible for four types of activity, namely the publication of a catalogue, the publication of a magazine entitled Wallonie nouvelle, the running of local offices and participation in local events. Under the framework agreement, OPW shall draw up its budgets on the basis of the previous year’s subsidy … . The reference year for the starting-point of that system is the year 1994 with a subsidy of BEF 11 000 000. The framework agreement also provides that permitted expenditure shall include in particular the remuneration of staff, the cost of renting and fitting out premises if necessary, the cost of obtaining necessary equipment and supplies, purchases of goods and services and any other costs, direct or indirect, relating to the activity of OPW, concerned by this agreement.
At an audit in February 1997, the Belgian tax authorities, having found that OPW had not paid VAT on the subsidy, made a tax adjustment of BEF 6 712 500 for the years 1994 to 1996. A VAT demand for that amount was then issued against OPW and it was fined BEF 1 349 000.
OPW made a formal objection to that demand before the Tribunal de première instance de Charleroi.
In the order for reference, that court notes in particular that:
- Article 26 of the Code de la TVA (Belgian VAT Code), which transposes Article 11A of the Sixth Directive into Belgian law, defines the concept of taxable amount in respect of VAT;
- the parties to the dispute accept that a subsidy forms part of the taxable amount if it is directly linked to the price, which is true where it is paid to the producer or supplier of goods or services, it is paid by a third party and constitutes the consideration or a part of the consideration for goods or services;
- the parties disagree as to the scope of that third condition.

Questions

1. For the purposes of applying Article 11A of the Sixth Council Directive on the harmonisation of the laws of the Member States relating to turnover taxes …, do operating subsidies covering part of a taxable person’s running costs (investment aid, contribution to general or current expenses, staff costs) and affecting the final cost price of its goods or services, but which cannot be distinguished from the price of the supply, constitute a taxable amount?

2. Is their taxable nature conditional on the existence of a distinct service to the body paying the subsidy and on the benefit derived by that body being equivalent to the consideration supplied?

3. If so, how is the value of the benefit derived by the body paying the subsidy to be determined?

AG Opinion

1) First question:

Under Article 11A(1)(a) of the Sixth Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of Value Added Tax: uniform basis of assessment, the subsidies covering a part of the operating costs of a taxable person are liable to tax in so far as those subsidies are directly linked to a specific economic activity pursued by the beneficiary and thus lead to a reduction in the price of goods or services supplied by the beneficiary to a consumer or to an increase in the quantity of goods or services supplied. In light of the circumstances of the case it must be determined whether an operating subsidy leads to a reduction in price or an increase in quantity. That determination must be based, primarily, on business considerations relating to the undertaking.

(2) Second and third questions:

It is not necessary to reply to these two questions since they are not connected with the subject-matter of the main proceedings.

If the Court does not share that view, its reply to the questions might be as follows: in the situation described by the referring court there is no subsidy, but rather a payment for a service provided to the public authorities. Such payment is liable to VAT.

Decision

For the purposes of Article 11A(1)(a) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment subsidies directly linked to the price must be interpreted as covering only subsidies which constitute the whole or part of the consideration for a supply of goods or services and which are paid by a third party to the seller or supplier. It is for the national court to determine, on the basis of the facts before it, whether or not the subsidy constitutes such consideration.

Summary

The concept of subsidies directly related to the price only covers subsidies which are wholly or partly consideration for a supply of goods or services and which are paid by a third party to the seller or service provider.

Source