PFR subsidy received under the Anti-Crisis Shield and VAT

Service-Tax

The anti-crisis shield support options for rescuing and maintaining Polish enterprises included the PFR subsidy, which was applied for by a large group of companies (both in the first and second edition). The funds from the PFR subsidy were allocated by entrepreneurs to various types of expenses. Then this year, for the first time, they are required to settle the funds spent. Apart from the difficult procedure of settling the funds spent, some entrepreneurs doubted whether the received PFR subsidy under the Anti-Crisis Shield should be subject to VAT? Should entrepreneurs tax part of the subsidy received with VAT? What does it all depend on and why would the impact of the subsidy be subject to VAT? These and many other questions have been answered in the analysis below.

Receipt of assistance in the field of the Anti-Crisis Shield

During the COVID-19 epidemic, entrepreneurs use various types of government support options offered under the Anti-Crisis Shield.

There are many help tools - exemption from paying ZUS contributions, co-financing employee salaries, downtime allowance, subsidies for the running costs of running a business, as well as a PFR subsidy.

With regard to the receipt of the last aid measure, there were doubts as to whether the entrepreneur should include the obtained PFR subsidy in the tax base in some cases.

PFR subsidy - what can the obtained funds be spent on?

Last and this year, micro, small and medium-sized entrepreneurs applied for co-financing from the Polish Development Fund in the form of a partially returnable subsidy. This co-financing could be allocated by the entrepreneur, among others on (data included in the table):

What expenses can be financed from the PFR subsidy?

1.

Real estate rents

2.

Purchase of goods and materials

3.

Settlement of the costs of services provided by subcontractors

4.

Coverage of salaries and social security contributions from these salaries

5.

Payment of public law liabilities

6.

Repayment of current and overdue external financing service costs

Nevertheless, some costs were excluded from the list of eligible expenses for which funds from the PFR subsidy could be allocated. These are i.a. (data are included in the table below):

Expenses excluded from the possibility of financing with a PFR subsidy

1.

Transfer of the subsidy to the owners or entities associated with the beneficiary

2.

Pre-payment of loans, leases and other similar instruments

3.

Financing of the purchase (takeover) transaction, directly or indirectly, in part or in whole, of another entity - you cannot take over other enterprises with subsidies

4.

Severance pay and other benefits related to the termination of legal relations between the entrepreneur and the persons employed by him

5.

Awards, bonuses, profit sharing and other discretionary benefits paid to employees by the entrepreneur in addition to the basic salary, sick pay or downtime pay

An essential way of qualifying a subsidy

Most entrepreneurs applying for assistance from the financial shield in the form of a PFR subsidy allocated the funds obtained to:

  • acquisition of goods for resale;

  • purchase of materials, tools, equipment necessary to perform the product (finished product or service);

  • payment for rental, leasing, accounting, service, renovation and many other services;

  • payment for electricity, gas, water, internet - delivered to the company;

  • payment of social security contributions and certain tax liabilities;

  • covering the costs of remuneration together with ZUS contributions;

  • covering the costs of hiring new employees along with social security contributions;

  • repayment of outstanding and current interest on loans or leasing;

  • purchase of fixed assets, excluding their use for the acquisition in various forms of another entity;

  • other expenses.

Entrepreneurs who used the funds received from the PFR subsidy to cover the above-mentioned (or similar) types of expenses, will not be obliged to tax the received co-financing with VAT. However, the allocation of funds alone is not enough. It is important that the subsidy received is correctly qualified with regard to VAT.

The VAT tax base and the received PFR subsidy or subsidy

Pursuant to Art. 29a paragraph. 1 of the Act of March 11, 2004 on tax on goods and services (hereinafter referred to as the VAT Act), the tax base is everything that is the payment that the supplier of goods or the service provider has received or is to receive for sale from the buyer, recipient or third party , including received grants, subsidies and other payments of a similar nature directly affecting the price of goods or services provided by the taxpayer.

The VAT tax base also includes taxes, duties, fees and other charges of a similar nature, except for the amount of VAT, as well as additional costs, such as commissions, packaging, transport and insurance costs, charged by the supplier or service provider from the buyer or service recipient . Taxation of subsidies and subsidies with VAT is an exceptional situation depending on several main factors. It should be remembered that some of the subsidies will be included in the VAT tax base, while others will not. The above-mentioned components are listed in the VAT Act and are included in the VAT tax base. Determining whether all or part of the received subsidy, subsidy (or other aid of a similar nature) will be included in the VAT tax base requires an analysis of the terms of the grant agreement each time. In addition to the conditions, the purpose for which the funding may be allocated is also extremely important. The basic factor allowing to recognize whether the received PFR subsidy will be included in the VAT tax base or not is the qualification of the goal to be achieved through a given subsidy, and therefore the allocation of funds. The first question that an entrepreneur should ask himself is whether the received subsidy was granted for the purpose of co-financing a specific (contractually agreed) activity that will be subject to VAT.

It is worth adding here that subsidies and subsidies that cannot be classified as related to certain activities subject to VAT, will not be included in the VAT tax base.

Receipt of a subsidy or subsidy will be included in the tax base in the event that it constitutes a surcharge related to the delivery of a specific good or provision of a specific service.

Thus, the entrepreneur will include the impact of the subsidy or subsidy in the VAT taxable base if it is classified (allocated), assigned to co-financing a specific good or service.

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What determines the VAT taxation of a subsidy or subsidy?

Bearing in mind the nature of the PFR subsidy, it should be emphasized that the VAT tax base does not include subsidies, so-called subsidies. general, i.e. intended to cover general expenses not related to any specific good or service.

The exception, however, is the receipt of a subsidy, which will constitute an additional payment to a part of the price of a specific good or service. Another situation of taxing subsidies with VAT will be the case when a given subsidy will constitute a kind of compensation for the provision of a specific service or the sale of a specific good at a lower price.

Grants and subsidies that constitute general financing, for example to cover the running costs of an activity, do not have a direct link with the sale of a specific good or service. Thus, the PFR subsidy, which is a general co-financing of the costs of running a business, will not be included in the VAT tax base.

Thus, subsidies and subsidies directly affecting the selling price of goods or services of the subsidy beneficiary will be subject to VAT. On the other hand, subsidies and general purpose subsidies will not be subject to this taxation.

This is confirmed by the judgment of the Provincial Administrative Court of October 3, 2018 (reference number I SA / Wr 497/18), in which the court explains that "[...] the cited provisions of the CJEU jurisprudence, as well as remarks in the literature indicate that if a taxpayer receives subsidies (subsidies, other surcharges) in connection with a specific supply of goods or services, constituting an additional payment to the price of a good or service, such subsidy is, next to the price, for the supply of goods or services, an element supplementing the tax base.

The condition for recognizing a subsidy as increasing turnover is therefore the statement that the purpose of the subsidy is to finance a specific activity subject to tax on goods and services.

Where the subsidy cannot be linked to specific activities subject to VAT, the subsidy will not increase the taxable amount for that tax.

According to Art. 29a paragraph. 1 of the VAT Act, the VAT tax base is increased only by those subsidies that are directly related to a given supply of goods or services.

If there is no such direct relationship and the subsidy is granted to cover general operating costs (including the costs of implementing a specific project), then such subsidy will not increase the taxable base with value added tax, which means that it will not be subject to taxation.

This means that if the subsidy is individually and quantifiable related to the price of a given benefit (i.e. the benefit due to the subsidy has a price lower by a specific amount), such subsidy is taxable. If, on the other hand, there is no such relationship and, at the same time, the subsidy is not part of the remuneration related to the supplies of goods or services in question, then it should be treated as a payment not subject to value added tax.”.

On the other hand, the Court of Justice in its judgment of November 22, 2001 (reference number C-184/00) stated that a subsidy or subsidy (paid by a third party) related to the selling price of goods or services constitutes all or part of the remuneration for the sale of these goods or services .

The beneficiary of such a subsidy or subsidy, if qualifying for it, is obliged to spend it in part or in full for the supply of certain goods or services, and this supply (including part or all of the subsidy or subsidy in the price) is subject to VAT.

TS pointed out that the subsidy must be unambiguously related to the price (with remuneration for the delivery of a specific good or service).

The subsidy (subsidy) is a component of the final price to be paid to the buyer. On the other hand, the entrepreneur, by determining the price to be paid taking into account the received subsidy, reduces the previously agreed price proportionally to the received subsidy. Thus, the subsidy is one component of the fixed price. It allows the entrepreneur to lower the price of the goods or services sold, which would not be possible without receiving it. A close relationship between the price reduction and the subsidy is indispensable in this situation.

Therefore, if the received subsidy is to be one of the components of the price of certain goods or services sold (price surcharge) allowing for its reduction or receiving (price) compensation, it will be included in the tax base at the time when the VAT obligation arises. However, if there is no relationship between the subsidy and the price (the subsidy is not a component of remuneration for the supply of goods or services), the subsidy should be treated as not subject to VAT.

PFR subsidy to cover the running costs of running a business and VAT

The VAT taxation of the PFR subsidy was analyzed in the individual interpretation of October 29, 2020, issued by the Director of KIS (reference number 0111-KDIB3-1.4012.647.2020.8.ICZ).

In the case under consideration, the taxpayer received a PFR subsidy from the Polish Development Fund S.A. as part of the project "Financial Shield of the Polish Development Fund for Small and Medium Enterprises".

The co-financing received will be used to cover the current costs of business activity (employee salaries, office costs, costs of purchasing materials, etc.). It will not constitute any subsidies to the price of services or goods provided by the taxpayer, so due to the PFR subsidy received, customers will not pay lower prices for the goods or services sold by the grant beneficiary. Thus, disbursement of PFR subsidies was associated with making purchases for the conducted activity and covering the necessary costs.

The taxpayer precisely specified the purpose of the PFR subsidy:

Purpose of the PFR subsidy and the obligation to tax with VAT

Specificity

VAT taxation

The agreement concluded between the beneficiary and PFR does not contain information that the subsidy received is a repayable loan. Thus, the subsidy contract cannot be classified as a loan contract in the light of Art. 1 clause 1 point 1 lit. b of the Act on tax on civil law transactions

IS NOT SUBJECT TO

The PFR subsidy agreement allows the beneficiary to redeem all and part of the subsidy by the PFR, which is not included in standard repayable loan agreements

The PFR subsidy is not (in whole or in part) a surcharge to the prices of specific services provided by the taxpayer or goods sold (obtaining the PFR subsidy will not affect the price at which customers purchase goods or services from the taxpayer)

The PFR subsidy is of a purchasing nature, it is intended to cover the costs related only to running a business

The authority issuing the interpretation concluded that all the circumstances indicate that in the case of receiving the PFR subsidy under the "Financial Shield of the Polish Development Fund for Small and Medium Enterprises" "[…] There will be no situation in which there will be specific benefits in return for specific remuneration. Since the grant received will be allocated by the Applicant only to finance the general costs of business activities, i.e. employee salaries, office costs, costs of purchasing materials for the execution of orders, etc., this subsidy will be a purchasing subsidy and the subsidy will not finance the price of the by the Applicant of goods or services.

Thus, due to the fact that the financial subsidy covered by the question will be allocated to the financing of the Applicant's general economic activity, it does not affect the price of the services provided by the Applicant or the goods sold and it does not constitute the taxable amount within the meaning of Art. . 29a paragraph. 1 of the VAT Act. Consequently, the above-mentioned the subsidy is not subject to tax on goods and services [...]”.

Mixed sales and the PFR subsidy

Taxpayers who purchase goods or services for the purposes of their business activity and use them for sales subject to VAT and exempt from VAT, are required to establish a special VAT ratio.

It enables the exercise of the right to deduct VAT on purchases of goods or services for the purpose of making sales subject to VAT and exempt from VAT (i.e. mixed). In order to determine the proportion of VAT, it is necessary to take into account the share of the annual turnover from sales activities, in connection with which the taxpayer is entitled to reduce the amount of VAT due by the input tax on purchases related to a given sale (subject to VAT) in the total turnover obtained from sales activities, in connection with which the taxpayer's implementation:

  1. has the right to reduce the amount of VAT due by the input tax on purchases related to a given sale (subject to VAT),

  2. there is no right to reduce the amount of VAT due by the input tax on purchases related to a given sale (VAT exempt).

The PFR subsidy, as previously shown, does not constitute the basis for VAT taxation, so it should not be included in the turnover determining the VAT deduction ratio.

Only subsidies that constitute subsidies to the prices of goods or services sold by the taxpayer will have to be obligatorily included when determining the VAT deduction coefficient. In the same way, subsidies should be identified for the purposes of determining the turnover versus the calculation of the pre-ratio.