Symbolic remuneration is insufficient for economic activity - BFH ruling XI R 35/19

Free of charge supplies are a problem for VAT purposes: If there is no case of taxable gratuitous transfer of value, the gratuitousness leads to the fact that there is no right to deduct input VAT for supplies purchased for this purpose. In practice, this situation is often avoided by agreeing on at least a small, possibly only symbolic remuneration – if the requirements of the minimum assessment basis are not met. The ECJ decision in the "Gemeente Borsele" case has severely restricted this alternative. The XIth Senate of the BFH (Federal Fiscal Court) is now also dealing with this.

Facts:  Municipality leases loss-making swimming pool

A municipality operated a swimming pool that was permanently producing losses. To limit these losses, it leased the swimming pool to an association for an agreed rental fee of € 1 per year. The same contract stipulated that the municipality should pay the association an annual subsidy of € 75,000. When the municipality considered renovating the swimming pool, it was concerned about the input VAT deduction from the necessary input supplies and therefore contacted the tax office. The tax office concluded, as did the tax court in the later lawsuit, that an input VAT deduction was not possible. The fee was so low that it could not be regarded as consideration for the lease of the swimming pool so that the municipality's activity was considered non-economic. The fact that the municipality and the association had in the meantime revised the contracts to raise the rent to € 10,000 and moved the subsidy (now € 90,000) to a separate contract did not change anything.

Decision of the XIth Senate: No economic activity, no input VAT deduction

The Senate referred to the ECJ case law in the "Gemeente Borsele" case. This case involved a municipality that provided school transport by bus and charged the pupils’ parents either no fee or only a very low fee so that only about 3% of the costs were recovered. The ECJ found an "asymmetry" between the costs and the amounts received, which were therefore considered a kind of fee rather than a remuneration.

The Senate applied these principles to the present case. The relationship between the transfer of use and the obligation to pay had been resolved here and the one euro was not an actual counter value for the lease. The new contractual arrangement did not change this fact either, because by increasing the subsidy at the same time as the rent, the net result, from an economic viewpoint, was the same. Nothing changed economically between the two parties. As the lease agreement and the subsidy agreement were interrelated, they could not be considered separately.

Impact:  Carefully examine charges that do not cover costs

The times when one could secure an input VAT deduction with symbolic fees are over. However, it should also be clear that not every payment that does not cover costs can also lead to something being considered a non-economic activity, because an entrepreneur may have valid reasons for offering their services at a low price. VAT law only "punishes" this type of situation within the narrow limits of the minimum assessment basis. Obviously, however, there is a certain lower limit. What this lower limit is though remains unclear even after this BFH ruling and depends on the circumstances of the individual case. Such arrangements should be examined very carefully. If still possible, it is advisable to obtain a binding ruling from the tax office.

15 November 2022

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