Culture is an essential part of our society - worthy of support, but also in need of support. This area of conflict gives rise to the need for financial support in the form of donations and subsidies. Both are considered non-taxable items within the meaning of the VAT Act, but differ in their tax treatment: while subsidies result in a reduction in input tax (Art. 33 para. 2 VAT Act), donations have no effect in this respect (Art. 33 para. 1 VAT Act). The exact distinction is therefore of considerable practical relevance. A recent ruling by the Federal Administrative Court (A-2765/2022, decision appealed to the Federal Supreme Court) deals with the question of whether funds that a foundation passes on from previously received subsidies are in turn to be qualified as a subsidy or a donation.
BACKGROUND
A-GmbH is active in film production and receives funding for this from a foundation under private law, which, however, primarily pursues public purposes. In this respect, the foundation has replaced the film promotion program operated by the City and Canton of Zurich itself. For its part, the foundation receives subsidies from the canton and city of Zurich. As part of an audit, the FTA qualified the subsidies paid out by the foundation as subsidies and assessed an additional tax claim due to the failure to reduce input tax. The foundation appealed against this.
QUESTION
Subsidies and donations differ from each other in several respects. In the case of both subsidies and donations, the beneficiary does not provide a specific service in return.
In contrast to a donation, however, a subsidy is accompanied by a "behavioral commitment" that serves a purpose in the public interest.
A donation is made on a voluntary basis, whereas a subsidy is granted on a legal basis. When subsidies are passed on, the intermediate recipient is also obliged to pass them on or the final beneficiary has a legal claim to at least part of the subsidy.
In the present case, the court therefore had to clarify the question of whether the foundation passed on the funds with the mere intention of benefiting the complainant, with the right of the complainant to dispose of the funds as it sees fit (donation) - or with a clear purpose that goes beyond the mere intention of benefiting the complainant, which would mean that a subsidy could be assumed.
DECISION OF THE FEDERAL ADMINISTRATIVE COURT
A-2765/2022
In its decision, the ruling essentially focuses on the fact that the foundation should continue the former sovereign task of film promotion in a private law form. This means that the earmarking to which the public subsidies to the foundation are subject also extends to the subsidies that the foundation pays to filmmakers. This earmarking for the recipients of the contributions was reflected, on the one hand, in the purpose of the foundation and, on the other hand, in the principles of the contributions granted by the foundation, which were subject to a conditional repayment obligation. As a result, the court deduced that this earmarking for the recipients of the contributions in turn led to a restriction of the independence or freedom of use of the funds by the foundation - which would argue for a qualification as a subsidy (in effect: passed on to the recipients of the contributions) and against the assumption of a donation. This view is supported by the fact that the foundation is free to select the recipients of contributions, but not to decide whether to award grants. On the other hand, it is completely harmless that when the funds are awarded to the foundation, it is completely unknown to which recipients the foundation will ultimately award these funds.
In addition, the court emphasized that, based on the specific circumstances, it was always clear to the recipients that the foundation was merely a vehicle of the canton and city to implement their promotion of filmmaking - and that the foundation therefore passed on subsidies.
CONCLUSION
Since January 1, 2025, funds provided by public authorities have been considered a subsidy within the meaning of Art. 18 para. 2 of the VAT Act if they are expressly designated as such to the recipients. With the ruling of the Federal Administrative Court, the concept of a subsidy appears to have been extended to payments by private-law organizations - as long as it was only "recognizable" to the recipient that the funds ultimately came from the public sector and otherwise qualified as a subsidy. In future, artists will therefore have to check very carefully from whom they receive funding - and whether this may trigger an input tax correction. It remains to be seen whether the ruling will be upheld by the Federal Supreme Court.
