What are the disadvantages of government grants

Public money: real subsidy or VAT payable?

06/01/2006 | Government grants

by Dipl-Kfm. Carsten Leverenz, tax advisor, law firm Dr. Steinmetz & Fiedler, Henstedt-Ulzburg

Public grants - mostly granted by rural districts, cities and municipalities - are still one of the most important sources of funding for associations. In addition to the “classic” forms of subsidy, financing of shortfalls and institutional financing (with fixed annual amounts), performance contracts are becoming more and more important: The association does not simply receive money for its work, but the subsidy is tied to specific performance criteria. This can be the implementation of certain events, for example a cultural festival, or the care of a certain number of clients.

This moves income from government grants more and more into the focus of the tax offices. If there is a real exchange of services between the association and the sponsor, the payments are subject to sales tax. A significant part of the revenue goes to the treasury. Jurisprudence and decrees issued by the tax authorities are also increasingly addressing this issue. The following article brings you up to date.

The all-clear for most cases

The good news in advance is that the all-clear can be given for most cases. The usual budgetary requirements do not automatically speak in favor of an exchange of services. Grants from public coffers that are awarded exclusively on the basis of budget law and the general ancillary provisions issued for this are basically real grants. In the opinion of the Federal Ministry of Finance (BMF), the conditions set out in the ancillary provisions are not sufficient to accept a service exchange relationship (letter dated August 15, 2006, Az: IV A 5 - S 7200 - 59/06; access no. 062598).

The fact that the association is obliged to repay the donation in certain cases according to the donation contract does not matter (Bundesfinanzhof [BFH], judgment of July 28, 1994, Az: V R 19/92).

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