Subsidies from the municipality to sports clubs may not be VAT taxable - BFH ruling V R 17/20

In the opinion of the tax authorities, based on previous case law, payments for the assumption of tasks by corporate bodies under public law have always been taxable remuneration for services. However, in a recent ruling (V R 17/20 of 18 November 2021, published on 17 March 2022), the BFH (Germany’s Federal Court of Finance) decided otherwise. This case illustrates the need to carefully examine whether the entrepreneur is really performing a task for the municipality or is acting in its own interest.

Sports club operates a municipal sports facility

A municipality had let a sports facility it owned to? be used by a sports club free of charge. The sports club had contractually committed itself to the municipality to perform various activities connected with managing the sports facility, such as cleaning and maintenance. In the contract, the municipality agreed to pay operating subsidies to the sports club. The sports club did not treat these as taxable payments for supplies to the municipality, but rather as genuine, non-taxable subsidies.

The tax office disagreed, assessed VAT, and relied on the criteria developed by case law and adopted by the tax authorities for defining consideration/genuine subsidies. These criteria stipulate that remunerated supplies are taxable if there is a direct connection between the supply and a consideration received due to a legal relationship between the supplier and the recipient of the supply, within the framework of which mutual supplies are exchanged, with the remuneration being the consideration for the supply. Payments for performing the tasks of a corporate body under public law, which the parties have agreed to in a mutual contract, are generally considered part of an exchange of supplies (see also Section 10.2, para. 2, sentence 6 VAT of the application decree).

The action brought by the sports club was unsuccessful; the Financial Court also assumed that there was taxable remuneration for supplies.

BFH decision: economic reality is the deciding factor

The BFH had a different opinion. The question of whether this direct connection exists rests on the facts. In principle, the BFH is bound by the relevant findings of the lower court in the appeal proceedings pursuant to Sec. 118 (2) of the FGO (the law on the Financial Courts). In the present case, however, the Fiscal Court based its decision primarily on the wording of the contract of use, without examining the municipality’s overall objective. Thus, the Fiscal Court did not fully consider the relevant circumstances, nor did it consider the significance of these when forming its opinion, which the BFH may then do in the context of the appeal.

Taking into account the economic reality, the BFH thinks that the payments made by the municipality served to enable the sports club to use the sports facility for its own purposes. The fact that the sports club was not contractually obligated to the municipality to provide specific sports activities made it clear that the club was not managing the sports facility for the municipality, but rather for itself. The municipality had acknowledged that the club was providing a public benefit to the community and wanted to support its efforts through the payments.

In 2009 (19 November 2009, V R 29/08), the same senate of the BFH ruled differently on a case that initially appears to be similar. There, the plaintiff took over the modernisation and operation of municipal swimming pools on behalf of cities and municipalities. In this case, the senate treated the subsidies as taxable remuneration for supplies. However, this ruling was not transferable to the present case because there, unlike in the present case, the plaintiff had taken over a task that was the responsibility of the respective cities and municipalities. On 5 August 2010, the BFH issued a ruling (V R 54/09) on in a case also very similar to the one discussed here. In this case, an association took over the management of sports halls for the city and thus, in the senate’s opinion, provided specific supplies in the interest of the city, so that these facts also differ from the current case.

Practical implications

The current ruling has implications for subsidies in all conceivable areas - not just subsidies for the operation of sports facilities. The deciding factor in such cases seems to be whose interests the entrepreneur’s activities are serving, whereby the so-called economic reality carries more weight than the contractual agreements. It is important to note that this ruling does not invalidate the previous case law or Section 10.2 (2) sentence 6 of the VAT application decree, but merely limits its scope of application. Because it is hard to clearly delineate the interests of the parties involved, it is a good idea to obtain tax advice and, to avoid conflicts with the tax office, draft the contracts from the outset in a way that reflects the economic reality as closely as possible.

(Dated: 28 April 2022)