The form of on-lending funds, which is often popular with public funding providers, entails VAT risks for recipients at the first and second levels. The Düsseldorf Fiscal Court has ruled in favor of the grant character of the transferred funds for a special constellation.

In the case submitted to it (Düsseldorf tax court dated 22.11.2017, 5 K 3337/14 U), the court had to decide whether the funding granted to a central office for Franco-German and German-Polish youth exchanges should be treated in full as “genuine grants”.

The responsible tax office was of the opinion that the portion of the grant used for the administrative processing of the onward transfer to the project sponsors and their advice should be treated as service remuneration.

The judgment, which is 153 paragraphs long, shows that in cases where grants are passed on, it depends on the specific form of the grant notification, funding agreements and processes, and that the term “passing on” under grant law can be misleading if it is actually a two-stage funding procedure in which the recipient of the grant must treat the entire grant as a grant to itself at the first stage, and then itself acts as the provider of the grant to the recipients of the grant at the second stage.

The court’s reasoning is very much geared to the case at hand and, unfortunately, in some places it also ignores the existing administrative simplification benefits of public donors in the onward transmission procedure.

Nevertheless, there are important indications for the discussion of other cases. Among other things, it also states that “the fact that payments are linked for budgetary reasons to the fulfillment of the condition of appropriate use or a performance review (earmarking) (…) alone does not lead to an exchange of services”.