News from the Federal Ministry of Finance on VAT for public sector operations that constantly run at a loss

What was in force until now?

The right of public services that are run at a constant loss (e.g. cultural or sporting institutions, swimming baths, public transport, the social economy) to deduct input VAT is repeatedly the subject of proceedings at the ECJ and the Federal Tax Court. Past judgments had already emphasised the fact that there is only an actual supply for VAT purposes if and insofar as there is a direct link between the supply and the consideration. A mere symbolic consideration that is not of an economic nature is not sufficient. 

Until now, administrative practice generously assumed business activity for consideration in many cases, even if a large part of the costs were not covered by the consideration. For municipalities in particular, it was often accepted that there was a formal separation of consideration and subsidies, such as for lettings by the commercial operations of public law entities. This particularly applied when the lease and subsidy agreements were held in separate documents.

The Federal Ministry of Finance Circular of 15 December 2021 introduced a change in view for the first time, by the overall economic consideration coming into the foreground. Subsidies now had to be included more, particularly if they were more than the lease or were economically linked with it.

NEW: Two-step check (the key novelty)

The Federal Ministry of Finance has followed the ECJ and Federal Tax Court case law, clarifying that institutions that run at a constant loss are to be examined in two steps:

Step one: a direct link between the consideration and the supply 

The first test concerns the question whether there is a direct link between the supply provided and the consideration received. What is crucial here is that the consideration actually reflects the value of the supply – at least on its merits. This means that even when the consideration is less than the costs, this is not detrimental to its nature as consideration. What is important is that the consideration is economically relevant. If this link is missing – such as with symbolic price agreements that “obviously do not have the function of reflecting the value of the supply” – this is not a supply for consideration. In these cases this is already not a taxable supply, so the further test of business activity is not carried out.

Step two: existence of business activity on a case-by-case basis 

The second step examines whether the service for consideration from the first step also actually constitutes business activity. What is decisive here is an all-round evaluation of all the circumstances of the individual case: the activity must be designed to obtain income on a continuing basis and match the conditions at which comparable supplies are typically provided on the market.

The question is whether there is a significant imbalance between income and costs. If there is such an asymmetry, there actual link between the consideration and the supply may be missing – with the consequence that no business activity exists. The Federal Ministry of Finance specifies this with the presumption of non-business activity if the cost/income ratio is at most 3 percent; the costs are to be reduced by subsidies.

This presumption can be refuted, however, if the supply is provided below typical market conditions, the consideration is appropriate and factors such as number of customers, demand or market presence argue in favour of genuine participation in business. Potentially netting payments and subsidies can in individual cases be taken into account if the payments are between the same contractual partners.

Rules for application 

Funding for public operations running at a loss as part of integrated public services has been under pressure for many years. But regarding VAT, the tax authorities have kept quiet for a long time. The Federal Ministry of Finance Circular of 20 January 2026 has now put an end to this. 

These rules are to be applied in general to all open cases, although the tax authorities have allowed a transitional regime until 31 December 2027. This also expressly applies for the purposes of deducting input tax. Operators should check affected structures and financing models, so the necessary changes can be made by the deadline.