When a VAT-exempted society decides to host an event for the purpose of raising funds, such as a fundraising dinner, it was often uncertain as to whether the event was exempt from VAT. In the wake of a legislative amendment in 2016 a circular has now been released to clear up matters.
The VAT Code contains an exemption for the delivery of goods and services provided by specified social and cultural bodies related to their activities in order to gain funding. This exemption was introduced in order to stop VAT from becoming an obstacle to fundraising in terms of the price increase, which would hinder these institutions from gathering further resources.
But in spite of the good intentions that underlay this exemption, in practice its effect was often overshadowed by the foggy conditions for applying it, such as the notion of non-distortion of competition. These were the reasons why the proper use of the exemption was frequently a complicated matter. The amendment to the law and the subsequent clarifying government circular was an attempt to tackle these issues.
The legislative amendment of 27 June 2016
he first step towards sorting things out was in the Law of 27 June 2016, in which the existing exemption under article 44.2.12 of the VAT Code was amended. While the amendment’s intention was to clarify the exemption, the actual application – in particular the concept of distortion of competition – remained murky.
Next up: a clarifying circular
In order to deal with this, less than a year after the legislative amendment an administrative circular was published that contained the three cumulative conditions that must be met for an institution to be eligible for exemption (Circular 2017/C/23 dd. 19 April 2017).
Condition 1: The institution must be the organiser of the event
The exemption can be invoked by those institutions listed in article 44.2.12 of the VAT Code when they themselves act as the actual organiser of the event. According to the circular, this implies that they must have full responsibility for all organisational aspects, such as the programme, the set-up and the activities of the event, collecting the takings, doing the PR, etc. The circular does not explicitly answer the question of to what extent, if at all, certain part-activities can be outsourced to others.
A possible response can be found in Administrative Ruling no. E.T. 21326 dated 04-01-1977, in which the term organiser is further explained within the scope of the exemption for hosting talks (article 44.2.8 of the VAT Code). In this context the organiser must state the theme, determine the price, find the speakers and also act as the responsible organiser in the eyes of the audience (for example, the organiser must be identified on the programme and posters). But subcontractors can be used for certain technical or material services.
In line with the above, it appears that the authors of the law intended for the institution to take control itself and make all the most important decisions in terms of organising the event (including the type of event, the admission fee, fringe activities, etc). If subcontractors are used for a substantial proportion of the organisation, the taxman could challenge the application of the VAT exemption.
For example, an exempted youth movement which holds an annual fundraising dinner would have to find a location itself, purchase the beverages, generate publicity, and so on. When it outsources certain parts of the work (such as erecting the tent or the DJ) but still handles the PR, bartending duties, compiling the programme and other matters, we cannot see this as a factor that would disallow the youth movement from calling itself the ‘organiser’. On the other hand, when an event is wholly outsourced to an events company, then we do not believe the youth movement can still be considered the organiser. However we shall have to wait and see how strict the tax authorities will be in assessing these matters in practice.
Condition 2: Activities may only be of an intermittent nature
The fundraising activities cannot constitute an economic activity of the taxpayer. Specifically, the circular states that the activities:
- May only be of an intermittent nature;
- Must be intended for raising funds for the usual exempted activities of the institution;
- Must be organised exclusively for the benefit of the institution or must be employed for a good cause. A good cause is considered to be any institution, society, fund or natural person that, irrespective of whether or not they are accredited, works on a project or for healthcare, welfare, culture, the environment or international aid, without a commercial object.
If, for example, a museum runs a shop, then it will only be exempted for organising events where the proceeds are used exclusively for running the museum itself or for a good cause (and not for the running of the shop). This is why it is very important that the appropriation of the proceeds is properly documented. One matter that remains unclear is whether the organised event can be themed around the actual objective of the institution (so, can an exempted sports club host a sports event?). One could infer from the phrasing of the circular, which asserts that the activities cannot constitute an economic activity of the taxpayer, that the organised activities cannot be of the same nature as the principal activity of the institution. But one could also interpret that phrasing in the sense that they cannot be a regular occurrence. In our opinion it is the latter interpretation that holds.
Condition 3: No distortion of competition
Finally, the organised activity may not result in the distortion of competition with other economic actors that perform similar activities. The definition of distortion of competition remains vague in the circular – the activities may only generate exceptional revenue, they cannot constitute an actual separate economic activity and they may only focus on facilitating the institution’s achievement of its objective. The actual turnover generated is of no concern whatsoever.In this manner the circular does provide greater clarity: large sums of revenue, insofar as they remain exceptional, are not an obstacle when it comes to applying the exemption.
A concession from the authorities: no distortion of competition
As an act of toleration, distortion of competition is deemed not to exist if the event is hosted no more than four times a year. Moreover, the event may not last longer than three consecutive days (such as on a long weekend). When that threshold of four events is exceeded, then one must inform the relevant VAT inspection office, which will then rule on whether distortion of competition is at issue. They do not mind if the number of events incidentally exceeds four, but what exactly is deemed to be ‘incidental’ is not said. If it is established that distortion of competition is at issue, then VAT will be payable as of the first quarter after that number of events was exceeded. The event that caused the institution to cross the threshold remains exempted. The obligation to pay VAT on these activities will remain in place for at least a year, after which one can re-apply for VAT exemption by means of a motivated application. For the application of the administrative exemption over time, the number of events hosted since 1 January 2017 is assessed.
While the circular makes things clearer in respect of a number of important points, some questions remain unanswered. The greatest merit of the circular lies in the fact that it states that distortion of competition is not at issue when no more than four events are organised in a year. It remains unfortunate that a clearer positive definition of ‘distortion of competition’ was not included. So we shall have to wait and see what happens in practice.