Status as taxable person in loss-making activities – ECJ judgements "Gmina O." and "Gmina L." (C-612/21 and C-616/21)

In the "Gemeente Borsele" case, the ECJ had already ruled that purely symbolic charges with very little cost recovery were not a remuneration, but rather a type of administrative fee. Thus, there is also no right to deduct input VAT.

The BFH (Federal Fiscal Court in Germany) also endorsed this view with regard to a swimming pool leased for € 1 (as we reported here). Now the ECJ issued judgements in two cases involving municipalities that provided services for a fee that was more than just symbolic. Nevertheless, the activity was loss-making and could only be financed, if at all, by state subsidies. The ECJ said that this is not an economic activity.

The facts: Municipality provides below-cost services to residents

The two cases decided are similar: The Polish municipality of O. offered its residents a deal: it would purchase and install renewable energy systems for them and let them use these, and later transfer ownership of these systems to them. The municipality of O. expected to receive a subsidy of 75 % of the eligible costs from the responsible Polish administrative district. Residents who took advantage of this deal had to pay the O. municipality a contribution of 25 % of the eligible costs, limited to a certain maximum amount.

The Polish municipality of L. participated in a nationwide programme for the removal of asbestos. Upon application, it had asbestos removed from the homes of eligible residents without charge to these residents. The municipality expected to receive subsidies of 40% - 100% from a state subsidy fund.

ECJ: This is not how an entrepreneur operates

In both cases, the ECJ did not have a problem with the remunerative nature of the supply - not even in the case of the L. municipality in which the residents were offered this service free of charge. Rather, the ECJ succinctly assessed the subsidies as remuneration from a third party. The fact that the remuneration falls short of the market price is also irrelevant here. However, the ECJ concluded that the municipalities had not performed an economic activity. One justification given was the lack of sustainability because the activity was not intended to be repeated. Another factor relevant to the ECJ’s decision was that the municipalities knew from the outset that the activities would not generate a profit although they bore the risk of loss, and had to wait for the (to a degree uncertain) subsidy. This was not economically viable and did not correspond to the approach of an entrepreneur.

This also precluded the input VAT deduction from input supply purchased by the municipalities.

Practical significance

While until now only symbolic charges with an asymmetry between revenues and costs were an issue, the ECJ is now broadening its definition of a problematic case and scrutinising all loss-making businesses. As municipalities very often operate at a loss because the public interest is paramount, this case law will have a significant effect on them and they should examine these types of activities carefully. As far as still possible, a binding ruling from the tax office may be advisable.

It should be borne in mind that in the two Polish cases the ECJ was strongly guided by two facts that will not be present in all cases of loss-making municipal activities: (A) that the municipalities could not be completely certain of receiving the subsidies and had to wait for them, and (B) that the activity was not intended to be repeated. Whether the judgements are really transferable to one’s own situation should therefore be examined in each individual case. If the circumstances do not meet the ECJ’s definition of an economic activity, municipal projects become more expensive because the input VAT surplus that usually exists cannot be claimed from the tax office.

Dated: 25 April 2023

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