Dutch Supreme Court, 23 February 2018, case 16/04051

State grants received by institutions for higher education should be excluded from the calculation of the pro rata deduction right according to a decision of the Dutch Supreme Court, delivered on 23 February 2018.

The case

The case relates to a Dutch institution for higher education that performs VAT-exempt educational activities, for which it receives tuition fees. Furthermore, the institution performs VAT-taxable activities such as the sale of educational materials. The institution also receives substantial funding through state grants (rijksbijdragen). These grants are not considered to be a remuneration for certain activities. As the institution provides VAT-exempt and VAT-taxable activities, the institution has a pro-rata deduction right.

The institution took the position that the state grants should be disregarded when determining its pro-rata deduction right. The Dutch Tax Authorities did not agree with this position. The Dutch Supreme Court was asked to settle the matter.

Judgment

The Dutch Supreme Court decides that the state grants should be excluded from the denominator of the fraction that must be used when determining the pro-rata deduction right. The Court further considers that the EU VAT Directive does not allow for an application of the Dutch VAT Act in such way that the state contributions must be taken into account for determining the pro-rata deduction right.

The Supreme Court also rules that the composition of the funding of the institution does not reflect the actual use of goods and services by that institution.

Conclusion

This judgment shows that institutions for higher education should disregard state grants when determining their pro-rata deduction right. This judgment of the Dutch Supreme Court is in our view in line with EU case law. Furthermore, it seems to be that (other) grants and compensations could be left out when determining the pro-rata deduction right. We recommend to asses whether these kinds of transactions are considered when determining the pro-rata as this would result in a higher pro-rata deduction right.