Spain’s Supreme Court issued a decision on 7 July 2025 in which it confirms that subsidies for public services not linked to the price of relevant services are not subject to VAT.
The case before the court involved a company that operated a public inter-urban transport service on several routes in La Rioja. The company received annual subsidies from the regional government to compensate the company for its operating deficit, which resulted from the fact that fares for the transport services were insufficient to cover the costs of providing the services. The dispute arose when the company tried to amend its VAT returns for 2016 on the ground that the subsidies were not directly linked to the price of the services it provided. The tax authorities took the position that the subsidies were taxable because they supported the company's public transport operations and, therefore, they were directly linked. The company appealed.
Both the Regional Economic-Administrative Court and the High Court of Justice of La Rioja rejected the company's claim, holding that there was a relationship between the price of the transport tickets and the subsidies received by the company, which justified including the subsidies in the VAT taxable base. The Supreme Court disagreed with both courts and ruled in favour of the taxpayer, annulling the previous decisions and ordering the repayment of the amounts unduly paid, with interest. The Supreme Court relied on its previous case law, as well as decisions of the Court of Justice of the European Union (CJEU), in particular, the CJEU decision of 8 May 2025. In the May decision, the CJEU ruled that a public subsidy paid to a transport company was not subject to VAT because it was not linked to the sale of tickets or individual services provided to passengers. The CJEU confirmed that subsidies must be directly and economically connected to the price of a service to form part of the VAT taxable base.
Spain’s Supreme Court concluded that the subsidies granted by public entities to finance the management of public services do not constitute operations subject to VAT where the subsidies are intended to cover operating deficits. Specifically, the subsidies were not determined in advance nor were they based on the volume of services provided, and the ticket price was set by the local authorities, not the transport operator. In addition, there was no direct legal link between the public entity granting the subsidy and the users of the services. The subsidy effectively represented economic compensation that guaranteed the viability of an essential public service, without significantly distorting competition.
The court emphasised that what is at issue is not a subsidy linked to price, but rather a contribution intended to cover costs that the market cannot pass on to users. In this respect, the CJEU decision supports the conclusion that, in the absence of a direct relationship between the subsidy and the price paid by users of the transport services, there is no transaction subject to VAT. The Supreme Court’s interpretation is in line with EU jurisprudence and provides legal certainty to operators that manage public services partially financed by subsidies.
Alvaro Gomez-Elvira
Maria Gonzalez
BDO in Spain
The case before the court involved a company that operated a public inter-urban transport service on several routes in La Rioja. The company received annual subsidies from the regional government to compensate the company for its operating deficit, which resulted from the fact that fares for the transport services were insufficient to cover the costs of providing the services. The dispute arose when the company tried to amend its VAT returns for 2016 on the ground that the subsidies were not directly linked to the price of the services it provided. The tax authorities took the position that the subsidies were taxable because they supported the company's public transport operations and, therefore, they were directly linked. The company appealed.
Both the Regional Economic-Administrative Court and the High Court of Justice of La Rioja rejected the company's claim, holding that there was a relationship between the price of the transport tickets and the subsidies received by the company, which justified including the subsidies in the VAT taxable base. The Supreme Court disagreed with both courts and ruled in favour of the taxpayer, annulling the previous decisions and ordering the repayment of the amounts unduly paid, with interest. The Supreme Court relied on its previous case law, as well as decisions of the Court of Justice of the European Union (CJEU), in particular, the CJEU decision of 8 May 2025. In the May decision, the CJEU ruled that a public subsidy paid to a transport company was not subject to VAT because it was not linked to the sale of tickets or individual services provided to passengers. The CJEU confirmed that subsidies must be directly and economically connected to the price of a service to form part of the VAT taxable base.
Spain’s Supreme Court concluded that the subsidies granted by public entities to finance the management of public services do not constitute operations subject to VAT where the subsidies are intended to cover operating deficits. Specifically, the subsidies were not determined in advance nor were they based on the volume of services provided, and the ticket price was set by the local authorities, not the transport operator. In addition, there was no direct legal link between the public entity granting the subsidy and the users of the services. The subsidy effectively represented economic compensation that guaranteed the viability of an essential public service, without significantly distorting competition.
The court emphasised that what is at issue is not a subsidy linked to price, but rather a contribution intended to cover costs that the market cannot pass on to users. In this respect, the CJEU decision supports the conclusion that, in the absence of a direct relationship between the subsidy and the price paid by users of the transport services, there is no transaction subject to VAT. The Supreme Court’s interpretation is in line with EU jurisprudence and provides legal certainty to operators that manage public services partially financed by subsidies.
Alvaro Gomez-Elvira
Maria Gonzalez
BDO in Spain