VAT status finally clarified for public entities?

VAT status finally clarified for public entities?

"Governments and public entities such as cities and municipalities are in principle not considered as VAT taxable entities for the activities they perform in their capacity “as government”. In certain circumstances they are nevertheless treated as VAT taxable entities, especially in case a treatment as non-VAT taxable entity leads to a distortion of competition. A municipality will, for example, be considered as a VAT taxable entity for the operating paid parking. How should these complex VAT rules be applied in practice? Administrative circular letter no. 42/2015 dated 10 December 2015, that entered into force on 1 July 2016, provides an answer.

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"Governments and public entities such as cities and municipalities are in principle not considered as VAT taxable entities for the activities they perform in their capacity “as government”. In certain circumstances they are nevertheless treated as VAT taxable entities, especially in case a treatment as non-VAT taxable entity leads to a distortion of competition. A municipality will, for example, be considered as a VAT taxable entity for the operating paid parking. How should these complex VAT rules be applied in practice? Administrative circular letter no. 42/2015 dated 10 December 2015, that entered into force on 1 July 2016, provides an answer.

When are you acting "as government"?

The Belgian state, the communities, regions, provinces, cities, municipalities and public institutions do not qualify as VAT taxable entities for the activities or actions they perform as government, even if they collect duties, levies, contributions or retributions for these activities. 

 

Public institutions only fall in the scope of this special VAT regime, if they meet all of the following conditions: 

  • The institution must have a different legal personality than the government institution which created it;
  • The institution is created by a law, a royal or ministerial decision, a decree or an regulation (creation in the form of a foundation);
  • The institution is created for the purpose of meeting a defined collective need, in the public interest;
  • The institution enjoys autonomy in performing its activities, more specifically in their organization and management;
  • The institution remains more or less subject to a number of controls including government supervision.

Public entities that are created in the form of an association (such as intercommunal associations, autonomous companies established by municipalities and provinces, etc.) and not as a foundation, are therefore not envisaged by the special VAT regime and do not fall in the scope of the new circular letter.

Principle: the government is not VAT taxable

Because it is in practice not always easy to distinguish whether an activity  is to be considered as a government act or not, the VAT administration will assume that public entities in Belgium are always acting  in their capacity of government and should therefore not be considered as VAT taxable. Some exceptions exist on this general principle, e.g. in case of "significant distortion of competition" or for "specific activities of significant scope". Some further explanations of these exceptions:

 

Exception 1: VAT taxable in case of "significant distortion of competition"

A public entity that is acting as government becomes VAT taxable for those activities for which a treatment as non-VAT taxable would lead to significant distortion of competition.

 

This may either be actual or potential distortion of competition, as well as distortion of competition in favor of or against the public entity. In addition, the distortion of competition needs to be "significant". In practice the significance needs to be assessed on a case by case basis, and this for each activity separately.The administration assumes that for a specific activity the "distortion of competition is not significant" if the annual turnover of that activity is less than EUR 25,000 (to be evaluated per activity performed).

 

It is important to note that the administration assumes that activities that are carried out by a public entity acting as government, and that are covered by the provisions of article 44 of the VAT code (e.g. real estate activities, medical services, etc.) lead in any case to potential distortion in competition. Whether the distortion of competition is significant, depends on the specific factual circumstances. Again, the administration applies the (refutable) assumption that the distortion of competition is significant if the above threshold of EUR 25,000 is exceeded.

 

Exception 2: VAT taxable for "specific activities that are significant in scope"

Public entities are in any case to be considered as VAT taxable for a number of specific listed activities, provided these are not "insignificant in scope". For these specific activities there is no need to assess whether there is potential distortion of competition. These activities include, amongst other, telecommunication services, advertising services, supply of water, gas and electricity, operation of ports, parking facilities or company cafeterias, etc.

 

Whether these activities are "insignificant in scope" depends again on the factual circumstances and needs to be assessed separately for each activity. From a practical point of view, the administration assumes that a specific activity is "not significant in scope" if the annual turnover of that activity is less than EUR 25,000.  

Mandatory application of the direct attribution method for claiming VAT deduction

Taking into account the specific circumstances under which public entities operate, they need to exercise their VAT deduction right applying the direct attribution method. For costs that cannot be allocated to one specific activity, a special prorata needs to be defined to determine the portion of the deductible VAT. 

What action do you need to take as public entity?

The provisions of this circular letter entered into force on 1 July 2016. It is recommendable to make an inventory of the different activities that you perform as public entity and to assess whether any of these activities, based on the new rules, could potentially be considered as VAT taxable.

 

Depending on your VAT status  resulting from the new VAT rules, there might be an impact on your right to deduct input VAT, as well as on the requirement to charge VAT on specific activities. In addition, there are some other points requiring consideration, such as:  possible requirement to pay VAT on  immovable property works carried out with your own staff, the possible VAT consequences of the supply of staff, e.g. by a local authority or CPAS (Public Centre for Social Action) to another public entity, specific implications for CPAS associations, etc.

 

 

Please do not hesitate to contact us if you would like to receive additional information.

© 2017 KPMG Central Services, a Belgian Economic Interest Grouping ("ESV/GIE") and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative ("KPMG International"), a Swiss entity. All rights reserved.

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