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V1272-14 13 May 2014 · SG de Impuestos sobre el Consumo Criterion in force
IVA · deducción de cuotas

VAT cannot be deducted on expenses for an EU-subsidised project

A local council has enquired whether it can deduct VAT on expenses related to a LIFE project co-funded by the EU. The Directorate-General for Taxes (DGT) has ruled that the funds received constitute subsidies rather than consideration for services; therefore, no exemptions apply and there is no right to deduction.

The question raised

Question raised: Deductibility of the operating and management expenses inherent to the project.

The DGT's ruling

The amounts provided by the European Union to the City Council constitute subsidies for the promotion of the environment and not a provision of services in favor of the Union. As no transaction subject to tax is carried out in favor of the EU, the exemption under the Protocol on Privileges and Immunities is not applicable. Furthermore, the VAT incurred on acquisitions is not deductible because the execution of the project does not constitute a business or professional activity of the City Council.

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