Subsidy or assignment?
What is the difference between a subsidy and an assignment? People often think, “It’s been tendered, so it must be a commercial contract,” but that’s not true. The difference is important, a.o. for VAT purposes.
The law determines: subsidy or assignment
What is the difference between a subsidy and an assignment? That is not always clear, and you cannot simply decide for yourself. You cannot turn something into a grant merely by labeling it as such in the contract. This makes sense, as VAT is payable on a contract but usually not on a grant. It is the law, therefore, that determines the classification. I often hear people say: "It was put out to tender, so it must be a contract." That is incorrect, because the legal definition makes no mention of tendering processes. Moreover, grants often have to be put out to tender as well. Besides, mistakes can happen. It is therefore important to consider the difference beforehand.
What does the law say?
The Dutch law defines a subsidy as: “an entitlement to financial resources provided by an administrative body for specific activities undertaken by the applicant, other than as payment for goods or services supplied to that administrative body.” That last point is important. If the police purchase bulletproof vests, it constitutes a commercial contract. Although the police operate in the public interest, those vests are actually purchased for and delivered to the police force itself. The situation differs when a medical scientist receives funding. The treatment developed is intended for patients, not for the government. Furthermore, the treatment itself is not what is delivered; rather, what is submitted is merely proof that the scientist has conducted the research. Therefore, to determine whether a transaction constitutes a contract for services or a subsidy, one must consider what is being delivered and for whom it is intended: is it something for the funding body itself, or is only proof of the activity being submitted?
What do the courts say?
If the definition does not provide a clear answer, the court considers the following: (i) whether the payment is equal to or lower than the cost price or includes a profit margin, and (ii) who initiated the project. The underlying idea is that a contractor aims to make a profit and generally will not start work until it is clear that someone will pay. A business owner considers potential customers and targets them. However, a company may sometimes wish to do something of social value, only seeking a government contribution at a later stage. This contribution may take the form of a subsidy, even if the recipient is a limited liability company (BV). The price is a key factor here: a contract usually includes a profit margin to account for entrepreneurial risk, whereas a subsidy does not; in principle, a subsidy is intended solely to cover costs. This is precisely why subsidies cannot be abruptly discontinued if a party has been receiving the same amount for years: profits are set aside for lean times, whereas, in principle, this is not done with subsidies.
Want to know more?
So, what is the difference between a grant and a contract? Focus on this key question: are goods or services being delivered, or is there merely proof that an activity has been carried out? A scientist is not required to repay funds if the research fails to yield a new medical treatment; however, repayment is required if the research was simply never conducted. This demonstrates that the funding was for an activity, not for a service or product. Still unsure? Please contact Mr. Dr. Vlieger.