VAT: Endowment capital of a public-law institution as a contribution to an enterprise, not as a subsidy; reduction of input tax deduction for a discounted building right ground rent

Facts

Parties and proceedings: The Kongresshaus-Stiftung Zürich, a public-law institution with its own legal personality (taxable person, appellant), represented by SwissVAT AG, challenges the Federal Tax Administration (FTA), Main Division Value Added Tax. The lower instance is the Federal Administrative Court, Division I, judgment of 9 March 2020 (A-460/2019). The Federal Supreme Court (II. Public Law Division, judgment 2C_356/2020 of 21 October 2020) decides on the appeal in public law matters.

Legal framework of the institution: Art. 119 GO 1970 of the City of Zürich establishes the institution for the purpose of providing and operating the congress and concert building on General-Guisan-Quai. It pursues no profit motive, receives an interest-free endowment capital from the city and possibly an operating contribution, takes over the assets of the private-law foundation established in 1937, including the building right agreement with the city, and is financed through fees paid by users.

Facts: The endowment capital amounts to CHF 165 million. For the independent and permanent building right, the institution must pay an annual building right ground rent of CHF 1'000 to the City of Zürich as landowner. The institution has been registered in the VAT register since 29 November 2016. Planned is the leasing of the congress and Tonhalle building with an option to tax to Kongresshaus Zürich AG and Tonhalle-Gesellschaft Zürich; a funding gap of at most CHF 2.9 million per year is to be financed by the city through an operating contribution. The endowment capital is shown in the city's participation register; the city exercises a significant control function.

Decision and lower instance: By decision of 28 November 2018, the FTA determined that the endowment capital and the reduction of the building right ground rent were subsidies leading to proportional input tax deduction reductions. The taxable person filed a direct appeal on 10 January 2019 and requested that the endowment capital be qualified as a contribution and that the building right concession be allocated to a VAT-exempt area of activity. The Federal Administrative Court dismissed the appeal.

Requests before the Federal Supreme Court: The appellant requested the annulment of the judgment of the lower instance, a declaration that the endowment capital counts as a contribution under Art. 18 para. 2 lit. e VATA and does not trigger a reduction under Art. 33 VATA, and a declaration that the building right concession under Art. 75 para. 1 VATO does not lead to an input tax reduction. The FTA requested dismissal; the Federal Administrative Court waived a response.

Considerations

Admissibility: The contested decision is a final decision of the Federal Administrative Court (Art. 90, Art. 86 para. 1 lit. a FSCA) on a declaratory decision of the FTA in the field of value added tax (Art. 82 lit. a FSCA; Art. 82 para. 1 VATA; Art. 25 para. 2 APA). A protectable interest in a declaration exists, since without a declaration the taxable person would have to take or refrain from measures that would cause it disadvantages. Standing (Art. 89 para. 1 FSCA) and the other procedural requirements are met; the appeal is admissible.

Legal framework: Value added tax is designed as a net multi-stage tax with input tax deduction (Art. 130 para. 1 Cst.; Art. 1 para. 1 VATA). Flows of funds that are not considered consideration in the absence of a supply are listed in Art. 18 para. 2 VATA. Subsidies and other public-law contributions (lit. a) lead to a proportional input tax deduction reduction under Art. 33 para. 2 VATA. Contributions to enterprises (lit. e), by contrast, do not trigger a reduction (Art. 33 para. 2 VATA e contrario). The subsumption must be determined economically and independently of the designation of the flow of funds; a statutory definition is lacking, and Art. 29 VATO is not exhaustive. The designation as a subsidy by the FTA and the lower instance is therefore not decisive; only the distinction between lit. a and lit. e needs to be clarified.

Distinction between subsidy and contribution: Subsidies are payments that form income for the recipient without granting participation rights. Contributions, by contrast, are capital injections into a company for the provision of equity capital in exchange for participation rights; for the contributor, there is a mere reallocation of assets. The case law on the former VATO (BGE/judgment 2C_647/2007), which relied on profitability and the concept of the investor, is no longer fully applicable under the VATA 2009, since contributions are now expressly not considered consideration and donations as well as contributions do not trigger a reduction.

Systematics and purpose: The input tax deduction reduction for subsidies under Art. 33 para. 2 VATA is inconsistent with the system, as it contradicts the principle of competitive neutrality (Art. 1 para. 3 lit. a VATA) and is justified on fiscal policy grounds. The concept of subsidy in Art. 18 para. 2 lit. a VATA must therefore be interpreted restrictively, while the concept of contribution in lit. e must be interpreted broadly. The Dispatch on the VATA (FF 2008 6885 ff., 6960) understands contributions broadly, namely shareholder contributions, capital contributions, grants and the granting of building rights without or with a reduced ground rent by directly participating companies; contributions from third parties without participation are, by contrast, donations or subsidies. The legislator was aware of the inconsistency with the system (FF 2008 6979).

Participation as a criterion: A flow of funds from a public body to a VAT-liable public-law institution is to be qualified as a contribution to an enterprise (lit. e) if the public body receives a participation in return; a merely economic participation is sufficient. If, however, the flow of funds is connected with income for the institution and an expense for the public body, it is more likely to be qualified as a subsidy (lit. a). The fact that a public body acts primarily in the public interest does not preclude a contribution; profit motive and profitability are not decisive, since otherwise contributions by a public body would practically never exist. The institution's lack of profit motive is also immaterial; the institution nonetheless operates an enterprise in the VAT sense (Art. 10 para. 2 lit. c VATA).

Endowment capital: The endowment capital usually forms the equity of the institution, is shown in the city's participation register and establishes an economic participation relationship. It therefore does not constitute income of the institution,…