VAT Effects of Public Subsidies in Spain

Published on 31 March 2023

Recent global events (COVID pandemic, war in Ukraine, etc.) have led many governments to implement public aid and incentive packages, resulting in increased liquidity

Keeping this in mind we are going to analyse a case recently decided by the Spanish Central Financial and Administrative Court (TEAC) on the VAT effects of subsidies granted for outsourced public services, a matter of considerable tax relevance in light of the increasing involvement of the State in the economy.

In this case, the city council operated the city’s public transport services indirectly by virtue of an administrative concession contract. Since the outsourced service was loss-making, as is not uncommon in public services, the city council paid a subsidy to cover these losses. The concession holder and incentive recipient issued the invoice including these subsidies as taxable base and charging VAT.

However, the city council did not agree that the subsidy received by the concession holder should be subject to VAT, as it was not the price of the tickets that was being subsidised, but the annual deficit resulting from the use of the concession. For this reason, the city council applied for a refund of the VAT unduly paid to the tax authorities and the matter was brought before the TEAC by virtue of an extraordinary appeal (recurso extraordinario de alzada).

According to the Spanish VAT Law, subsidies are only subject to VAT, if they are “directly” linked to the price of the operations. Therefore, it could be assumed that this rule does not apply to subsidies intended to cover a deficit in the tariff. However, in this case, as is the usual practice in this type of administrative concession, the contract’s terms and conditions stipulated that the concession holder would receive the tariffs payable by the users of the service as well as the subsidy granted by the city council as remuneration for providing the service, in order to maintain the financial equilibrium of the concession.

In light of this, the TEAC concluded that the content of the contract indicated a clear link between the payment of the subsidy and the public transport services rendered, even including the formula for calculating the subsidies. Hence, understanding that the VAT had been invoiced correctly, the court rejected the VAT refund.

In view of the increase of collaborations between private companies and the State, we recommend paying special attention to the terms and conditions of public contracts to determine whether the aid received is subject to VAT. If the concession holder were to issue an incorrect invoice, they could face heavy tax penalties due to the incorrect calculation of VAT.