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Energy price capping: compensation subject to VAT?

In February, the government approved an amendment to the government decree on compensation paid to suppliers for the delivery of electricity and gas at fixed prices, which was supposed to clarify whether this compensation is subject to VAT. The legislative council proposed deleting this provision from the amendment.

The draft decree contained a provision under which compensation was not to be considered a payment made in direct connection with the supply of electricity or gas, i.e., not to be deemed a payment for value added tax purposes and therefore not to be subject to VAT. However, both the legislative council and the Ministry of Finance opposed to this provision in the comment procedure. Their main issue was particularly that the government decree cannot implement any provisions of the VAT Act. In assessing whether the compensation is a consideration for the purposes of the VAT Act, the relevant provisions of the VAT Act must be applied.

In the approved wording of the amendment, the paragraph commenting on the provision of compensation from a VAT perspective was completely deleted; the amendment thus does not at all address the nature of this compensation.

However, contrary to the originally proposed wording, the prevailing view is that this compensation is a payment for the supply of electricity made by a third party to a final customer. Such an assessment then complicates the payment of VAT on the supply of electricity, where VAT should be paid not only on the amount paid by the customer (i.e., the maximum price) but also on the compensation received. At the same time, there may be situations where supplies of electricity by a trader will in some cases be in the standard VAT regime and in other cases in the reverse charge regime. We therefore recommend that compensation recipients consider the potential VAT implications on an individual basis.

The draft amendment to the government decree is currently awaiting publication in the Collection of Laws.