CJEU: Compensation for carrier losses without VAT and without surprises

In its judgment in the Polish case of 8^th May 2025, ref. C 615/23, the CJEU confirmed that lump-sum compensation paid by local government units to public transport operators, aimed at covering losses from this business activity, is not subject to VAT. The judgment confirms the previous practice on the qualification of public subsidies in the context of the tax base.

Facts – Polish context, real problems

The applicant in this case was a transport company intending to conclude contracts for the provision of public transport services with a local government unit. The company was to receive remuneration from two sources: ticket sales (at prices set by the local government unit) and compensation paid by the local government unit to cover losses resulting from the provision of transport services.

The national court before which the case was pending had doubts as to whether such a surcharge should be treated as an element of the VAT tax base. In accordance with the provisions of both EU and Polish regulations, all types of surcharges should be added to the tax base, provided that they have a direct impact on the price.

CJEU ruling

The Court found that this type of compensation does not constitute a basis for taxation with value added tax. The fundamental criterion it referred to was the lack of direct impact of the compensation on the price of the service provided to passengers. In the economic sense, such a general connection obviously exists – if the local government did not compensate for the carrier’s negative financial results, tickets would generally be more expensive. According to the CJEU, however, it cannot be considered that this connection is sufficiently clear, tangible and related to individually established prices of specific services provided to individual passengers. The subsidy was paid on a lump sum basis, and its amount depended on the number of vehicle kilometres offered – not on the number of passengers, the type of tickets sold or the sales revenue. Therefore, it was not a “subsidy directly linked to the price” within the meaning of Article 73 of the VAT Directive (and, accordingly, Article 29a paragraph 1 of the Polish Act).

Mutual benefit? No, either.

The CJEU also addressed the issue of the additional payment as a so-called mutual benefit, rejecting the possibility of equating compensation with payment for a service provided by a transport operator. The condition for taxation of the provision of services is the existence of an equivalent remuneration, which constitutes payment for this service. The local government as the transport organizer is not the beneficiary of the transport service – it is the passengers who pay the remuneration in the form of the ticket price. As a result of the lack of a direct reciprocity between the payment of compensation and the provision of services, its recognition as remuneration within the meaning of VAT regulations should be excluded.

Or maybe a service of being on constant standby?

The Court also referred to the argument that compensation could constitute remuneration for the carrier’s readiness to provide transport services, regardless of their actual performance. Case law generally allows such an approach when the consideration – even a flat-rate one – is linked to the actual service provided to a specific recipient (as, for example, in the judgment of 27 March 2014, Le Rayon d’Or, ref. C-151/13). However, there is no such link in the case of public transport. The amount of compensation does not depend in any way on the number or identity of the persons transported, but is strictly defined by the regulations and depends on the number of vehicle kilometres offered.

What does this imply?

The judgment confirms – and develops – the current line of the CJEU case law. In particular:

• the mere possibility of an indirect impact of the subsidy on the ticket price (i.e. “if it were not for the additional payment, prices would have to be higher”) does not mean that there is a subsidy increasing the VAT tax base,
• in order to increase the tax base, the subsidy would have to be an element determining the price of the travel for a specific passenger,
• the lack of an identifiable, individual benefit to a third party excludes the recognition of the additional payment as a mutual benefit,
• the financing of losses to a carrier by a local government resulting from the performance of the obligation to provide public services specified in separate regulations is not subject to VAT, even if it concerns a paid activity.

Significance of the judgment

The judgment confirms the current practice of both the CJEU and Polish courts. In a situation where the business activity of carriers providing public transport services is unprofitable, there is a need to compensate for losses from local governments budget. Such subsidies are an essential element enabling carriers to conduct their business and, as general subsidies not directly related to the provision of transport services, they are not subject to VAT.

It is worth noting that in practice there are also other situations of settlements for passenger transport, when the tickets are sold by the local government unit itself (ZTM), and the transport company performs services for it, for which it receives remuneration. Such cases are classic services subject to VAT.