VAT on Municipal Procurement – Legal Optimisation

Municipalities often provide many public services — for example, local media services — through companies of their own that they have set up for this purpose. A typical practice is that, in such cases, the municipality orders the service from its own company as a business undertaking and pays a service fee increased by VAT for it.

A municipality is not a VAT taxable person. If a municipality procures anything at a VAT-inclusive price, it must finance that VAT; it cannot reclaim or deduct the VAT, because it has no (and cannot have any) VAT-inclusive revenue against which the procurement could be set off.

If the municipality were to provide the given service under a public service contract, then — provided certain conditions are met — it would be able to finance essentially the same activity free of VAT.

The most important questions that municipalities may find it worth considering, if they wish to apply legal optimisation to the financing of their public services, are the following:

• What is the essential difference between a subsidy and consideration (a payment in return for a service)?
• What are the legal and tax implications of a payment qualifying as a subsidy versus qualifying as consideration?
• How can a subsidy be distinguished from a service-and-consideration relationship?
• Can a subsidy qualify as consideration?
• How can it be avoided that the financing qualifies as unlawful state aid?
• Which services can be procured under a public service contract?
• What are the essential conditions of a public service contract?

For municipalities, understanding the rules and possibilities relating to VAT is of key importance. Legal optimisation can help ensure that municipal services are not only of higher quality but can also be financed in a financially more advantageous way.