Case law on subsidies in the VAT Act

The following blog post provides information about the judgment of the Federal Court on July 28, 2014 (2C_1143/2013 and 2C_1144/2013). The Federal Court classified the compensation for transportation costs of students of a special school as subsidies within the meaning of Art. 18 Para. 2 lit. a MWSTG. Therefore, the service is not subject to value-added tax.

Facts

The Association A. operates special schools for children and adolescents with mental or physical disabilities. Association A. has entered into a framework agreement with Taxi Company B. to ensure the transportation of students. The taxi company bills its services at the standard rate of 8%. The costs of transportation can be charged back to the Canton of St. Gallen by Association A. The Federal Tax Administration (ESTV) concluded in an inspection that these charged-back transportation services were also taxable, as they represent a remunerated transportation service to the school-age children. The Federal Administrative Court approved these tax reassessments with a decision on October 30, 2013. Subsequently, Association A. filed a complaint against the ESTV in public law matters at the Federal Court and was successful.

Court's Considerations

Citizens are entitled to free basic education at the location where the schoolchildren usually reside. A separation of residence and school location should not lead to a restriction of free education. Domestically provided services for remuneration are subject to value-added tax (Art. 18 Para. 1 MWSTG). The transportation services of the taxi company are clearly taxable. It was disputed who the taxi company provides the service to. The immediate beneficiaries of the transportation agreement are the schoolchildren, and the guardians indirectly. Since there are no individual contracts between the taxi companies and the schoolchildren, but only the framework agreement between A. and the taxi company, the court assumes that Association A. is the recipient of the service.

Transportation services that must be provided due to an unreasonable school commute fall under the claim to free schooling. For the school-aged children, the services of the association are provided free of charge. This means that the payments from the Canton of St. Gallen to Association A. represent subsidies (Art. 18 Para. 2 lit. a MWSTG) and not a taxable remuneration for services. Thus, the mere passing on of an already value-added taxed service is avoided.

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