Subsidies as VAT taxable advance rental payments

The VwGH further held that VAT is generally triggered whenever there is a supply of goods or services in exchange for consideration. Advance payments may already be subject to VAT if the underlying service is sufficiently specified. Only those payments for which, at the time of receipt, it remains unclear whether they relate to any service at all or to which specific service they pertain are not subject to taxation.

In the case decided, it was clear that the payments were linked to refurbishment costs and to subsequently increased rental payments. The subsidies granted by the federal state and paid directly to the public-law entity (Körperschaft öffentlichen Rechts, KöR), and thus passed on via a shortened payment route, were therefore to be regarded as advance rental payments made by the GmbH and, as such, were subject to VAT at the level of the KöR.

Facts of the case

The proceedings concerned a public-law entity (KöR), which held 100% of the shares in a non-profit GmbH operating (limited liability company) a nursing home. The property in question was owned by the KöR and leased to the non-profit GmbH. In addition to the rent, the non-profit GmbH also bore all ongoing operating costs of the nursing home.

The GmbH requested that the KöR carry out refurbishment measures on the building. At the same time, the parties agreed on an increase in rent, through which the refurbishment costs were to be recovered over the long term.

In this context, the state of Lower Austria granted a subsidy to the GmbH. However, the subsidy was not paid to the GmbH but directly to the KöR. The parties agreed that the subsidy would be used to cover the refurbishment costs and would be considered when calculating the rent increase.

The tax office treated these payments to the KöR as taxable consideration for VAT purposes. From an economic perspective, the subsidy amounts were to be regarded as advance payments on the increased rent. The KöR argued that the subsidies had not been received by the GmbH and therefore could not be qualified as rental payments.

However, according to the Federal Finance Court (BFG), it was clear that the non-profit GmbH was the actual recipient of the subsidies. This was evident from the funding applications, which had been submitted and signed exclusively by the non-profit GmbH. Moreover, the funding agreement existed solely between the state of Lower Austria and the GmbH. The fact that the funds were transferred directly to the KöR was therefore considered a “shortened payment route”.

Since, according to the agreement, the GmbH ultimately had to bear the investment costs through the increased rent, the BFG concluded that, from an economic perspective, the subsidy funds constituted advance rental payments, which are subject to VAT at the level of the KöR.