Symbolic Fee Prevents Input Tax Deduction
The Federal Fiscal Court ruled that a nominal fee for the use of property does not entitle the provider to deduct input tax if the fee is disproportionately low compared to costs.
The German Federal Fiscal Court (Bundesfinanzhof) has issued a ruling impacting the input tax deduction rights for entities, particularly public bodies. In this case, a municipality leased a swimming pool to an association for an annual fee of one euro. The municipality also committed to an annual subsidy of €75,000 to the association, intended to support its public interest activities.
When planning a renovation of the swimming pool, the municipality inquired with the tax office about its eligibility for input tax deduction. The tax office and lower courts denied the deduction, arguing that the lease was not an economic activity due to the lack of substantial consideration.
The Federal Fiscal Court determined that when the annual fee is only one euro, while the municipality incurs significant expenses for the swimming pool's maintenance and renovation, the fee is too insignificant to establish a link between the consideration and the use of the facility. The court referenced European Court of Justice jurisprudence, which states that a disproportion between the fee and costs negates a taxable supply.
This ruling emphasizes that input tax deduction requires a genuine economic activity and a proportionate exchange. Even after adjusting the lease to €10,000 annually and increasing the subsidy to €90,000, the court found that the fundamental issue of disproportionate consideration remained, as the increased subsidy covered a larger portion of the costs.
The consulting firm dhpg advises businesses and public entities to carefully assess their contractual arrangements and potential tax implications, especially in cases with non-standard fee structures or significant expenditures, and to consider seeking binding rulings from tax authorities if necessary.