The latest judgment of the Court of Justice of the European Union (CJEU) of 8 May 2025 (Case C-615/23) confirmed the position presented earlier by the Advocate General in the opinion of 13 February 2025. According to this opinion, compensation paid by local government units (LGUs) to municipal companies for the provision of public transport services is not subject to VAT, as long as it does not directly affect the price of the service. Although the judgment concerns transport services specifically, it may have implications for other areas of public service provision in the future.
The case involved a company operating in the passenger transport sector, which intended to enter into a contract with an LGU for the provision of public transportation services. Under this arrangement, the company was to receive income primarily from ticket sales, with ticket prices set by the organizing LGU. Because this method of financing was insufficient to cover the costs of operations, the company was to receive additional compensation from the organizer. This led the company to request a private tax ruling to clarify whether such compensation would constitute a consideration subject to VAT.
The request was initially denied by the tax authority, but the decision was overturned by the Provincial Administrative Court (WSA) and later brought before the Supreme Administrative Court (NSA). The NSA questioned whether the compensation paid by the LGU to the company should be treated as a consideration for the supply of public transport services within the meaning of Article 73 of the VAT Directive, and thus subject to VAT.
The court examined whether the compensation should be included in the taxable base for VAT and posed several key questions:
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Is a direct link required between the compensation and the ticket price, such as a direct subsidy for the tickets?
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Is it enough to argue that, without the compensation, ticket prices would have to be higher?
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Can the continuity of services and the constant readiness to provide them constitute such a direct link?
In this case, the court noted that the compensation did not relate to a specific individualized service, but rather contributed to lowering the price paid by users. It was also limited to the company’s public transport activities, excluding other business areas. Due to these ambiguities, the court referred a preliminary question to the CJEU on whether Article 73 of the VAT Directive should be interpreted as including such compensation in the taxable base.
In its judgment, the CJEU emphasized that the referring court had rightly found that the compensation did not directly influence the service price. The main purpose of the compensation was not to lower ticket prices, but to cover the financial losses incurred through providing transport services. The ticket price was not set proportionally to the amount of the compensation either.
The CJEU aligned with the Advocate General’s conclusion that the compensation was granted a posteriori and was not dependent on actual use of the services, but on the number of offered vehicle-kilometers. Therefore, the compensation could not be considered a subsidy directly linked to the price within the meaning of Article 73 of the VAT Directive.
This conclusion was not undermined by the fact that, in the absence of compensation, ticket prices would need to be higher. The Advocate General rightly pointed out that all subsidies can influence pricing decisions, regardless of whether they come from the beneficiary or the organizer. The Court reiterated its earlier jurisprudence (e.g., Judgment of 22 November 2001, Office des produits wallons, C-184/00) stating that the mere fact that funding can influence the price level is not sufficient to consider it a subsidy directly linked to the price.
The CJEU also considered whether the compensation could be deemed consideration paid by a third party. However, unlike the case in Le Rayon d’Or (Judgment of 27 March 2014, C-151/13), in this instance there was no direct link between the payments and a service provided to a specific person. Public transport services are used by the general public, without the possibility of identifying individual users. Additionally, the compensation did not take into account the identity or number of passengers using a particular service.
This ruling follows the established interpretative direction of the CJEU, which consistently requires that amounts included in the VAT base must be directly related to a specific supply of goods or services to a particular customer. In this case, both the Court and the Advocate General agreed that such a direct relationship was lacking.