VAT Changes for Subsidies since January 2025

VAT changes for subsidies as of January 1, 2025

As of January 1, 2025, the revised VAT Act introduces clearer rules for the treatment of subsidies. The aim of the new regulation is to simplify the distinction between non-taxable subsidies and taxable consideration and to provide greater legal certainty.

New regulation for subsidies under Art. 18 para. 3 VAT Act

The revised VAT Act provides that funds qualify as subsidies if a public authority explicitly designates them as a “subsidy” or “public-law contribution” and communicates this designation individually to the recipient.

Once such a designation is made, the cash flow is non-taxable. However, this may lead to a reduction of the input tax deduction for the recipient pursuant to Art. 33 para. 2 VAT Act.

Key points for implementation

Designation as a subsidy must be explicit and communicated to the recipient no later than the end of the finalization deadline of the tax period in which the payment is made. A general publication, such as an entry in a subsidy database, is not sufficient.

The ESTV recommends written notification in the form of a contract, ruling, or similar document with reference to Art. 18 para. 3 VAT Act.

Designation of funds

Under the legal bases of the respective public authority, funds may also be designated as “financial aid” or “state contribution”. These alternative terms are permitted provided the requirements of Art. 18 para. 3 VAT Act are met.

No automatic reclassification if designation is missing

If the public authority does not explicitly designate the funds as a subsidy, this does not automatically mean that the cash flow qualifies as taxable consideration. The ESTV assesses the nature of the payment individually and may still classify it as a subsidy, consideration, fee, or other non-consideration.

Legal certainty and practical implementation

The clear definition and deadline rules increase legal certainty for companies and public authorities. Recipients of subsidies should take into account that subsidies generally lead to a reduction of input tax deduction and ensure that the designation is clearly documented in order to provide evidence in the event of an ESTV audit.

Timing and recommended actions

The new rules apply to subsidies granted as of January 1, 2025. Public authorities and companies should review and adapt existing processes for communicating subsidies, ensure timely and correct written designation, and assess the impact on their own input tax deduction, making accounting adjustments where necessary.