The renewal of entrustment acts in the municipal sector

Municipal organisations, whether in public-law form (e.g. as a municipal enterprise, public-law institution/municipal company) or in private-law form (such as a GmbH or AG), are the focus of European state aid law as potential recipients of aid. This legal system regulates the public financing of municipal companies, including facilities such as swimming pools, car parks, sports and cultural facilities and hospitals, and places strict requirements on the granting of state funding.

European state aid law contains a comprehensive ban on state aid that gives companies an economic advantage that they would not have received under normal market conditions. This includes direct state subsidies, subsidised loans, guarantees and other forms of support that are granted without appropriate consideration.

An important exception to this prohibition is the so-called services of general economic interest (SGEI), for which special entrustment acts are required. These acts regulate the conditions under which aid can be legally granted and are limited to a maximum duration of ten years. The need for a clear separation of finances between SGEI and other economic activities of the company is essential to ensure transparency and legality.

In practice, the expiry of numerous acts of entrustment usually requires a new issue. This opportunity should be used to make the necessary adjustments required by recent case law for entrustment in compliance with state aid law.

In addition to state aid considerations, it is equally important to consider the tax aspects of financing municipal companies. In particular, the distinction between the exchange of services and non-taxable genuine subsidies is of considerable importance.

Genuine subsidies that are granted without direct consideration are generally not subject to VAT. On the other hand, there are services that are provided as part of an exchange of services and may therefore be subject to VAT. The distinction is often complex and requires careful analysis of the respective contractual relationships and the actual flow of services. The form and wording of the acts of entrustment must also take tax requirements into account.

In order to minimise tax risks and obtain clarity about the tax treatment of specific actions, it is generally advisable to obtain binding information from the relevant tax office. This instrument enables companies to clarify the tax assessment of a planned economic activity in advance. Binding information is particularly advisable in cases where the VAT treatment of services provided as part of SGEI or the distinction between genuine grants and services subject to VAT is unclear. If entrusted companies are part of a consolidated tax group for income tax purposes, the effects of the so-called overcompensation block on the implementation of the profit transfer agreement are usually also the subject of the binding enquiry.

Our experts support you with their many years of experience and expertise in fulfilling the legal and tax requirements of your municipal companies.

Our range of services includes:

• the review and renewal of your entrustment file,
• assessing the compliance of your financing structures with state aid law,
• applying for binding information and
• optimising the tax aspects of your financing structures.

Please do not hesitate to contact us.