VAT and Excise duty exemption

ERICs qualify for VAT and excise duties exemptions being an international organization related to excise duties.

The implications are that VAT and Excise exemptions are granted for the purchase of goods and services under the following conditions:

a) Subjective status: the purchase is made by the ERIC or by a Member (options: directly or indirectly)

b) Objective situation: the purchase is for the sole (exclusive) use of the ERIC (options: only for institutional or partly for commercial purposes, but with proportional tax payments).

Since purchases have a significant role in the operation of most ERICs, having the VAT and Excise duty exemption brings great savings. According to an ERIC Forum survey, around 40% of the ERICs have recurrent and 45% sporadic procurement activities.

Until 2020 the exemption has been used only for the VAT. The use for Excise (i.e. for utilities) has not been used by ERICs yet and will be probably used only for energy-intensive facilities. There are no known cases of purchase from a provider outside the EU area. Import duties are to be treated separately and in some cases are exempted from research-related purchase.

There are two major Tax exemption application cases:

1. Tax exemption in case of purchase in the same country

The simplest case of this principle is the case in which an ERIC purchases goods or services directly from a provider in the same Country (no cross-border transfer).

The ERIC declares to the purchaser that the purchase is tax-exempt according to the legal framework as reported above, and the payment from the ERIC to the provider is tax-exempt.

This may apply for purchases in the Country hosting the Statutory Seat and, whenever the (multi-sited-distributed) ERIC has declared to run directly its facilities in another Country  (hubs, nodes, or Facilities in general) for purchase in that Country (in this case the facility can be defined as an “establishment”,  “outstation” or “office” of the ERIC, terms used in international law and Entities).

2. Tax exemption in case of purchase from an EU provider

The next (linear & direct) case: the ERIC can directly purchase from a provider (within the EU) for transfer and use in another EU Country.

The declaration must be made on the template provided by the EU and attached to the VAT Directive 2006/112/EC (form 15.10) subject to visa (or exemption from visa, as provided for in the same Directive) by the tax authority of the ERIC host Country. This requires preliminary contacts with the local tax authorities to define who is the validator (see tips below).

+ Tax exemption needing an indirect option

There are more complex cases, where the indirect option is required. Most of these cases have been encountered when one Member (Country) wants to contribute in-kind to an ERIC by purchasing -in tax exemption allowance as a Member of an ERIC – goods/services to be transferred to the ERIC. Government administrations cannot purchase directly, but normally purchase through a “Third Party” (Research Council, University, etc.).

The transfer (delegation) of the right to apply the tax exemption from the Member to a party is possible but there is an ongoing discussion (at EU and some Country’s level) whether this can be made by the selected party only “on behalf” or should be “in the name and on behalf”. While the first option may allow the selected Institution to procure and transfer goods/service in its name (and then transfer either the availability or the property to the “sole use” of the ERIC) the second one would force the State to become the owner (which is not practical). Some Countries (and their national tax authorities) accept to apply the second option, others do not: this is one of the issues to be defined with the local tax authorities.

When this is possible, the Party can be delegated by the Member on a specific case basis and only for a specific procurement, or can be delegated to act on behalf of the Member within a broader scope, e.g. when the party is nominated as a “Representing Entity” (Article 9 (4) of the ERIC Regulation). In this case it is important that the letter of nomination includes explicitly the delegation of the right to apply tax exemption.

One other complex case is the delegation of the right to purchase tax-exempt given from the ERIC to a “Party”. In this case, the only viable option seems that the party acts “in the name and on behalf” of the ERIC (i.e. the purchase becomes property of the ERIC). This option could help to overcome the difficulty of implementing in-kind contributions by a Member when the Member has financed a Party for this purpose and there is an agreement to transfer the property to the ERIC. In this case, the Party can be delegated by the ERIC to act in its name and on its behalf and pay with the funding given by the Member and available to the Party.

In those cases when a Party acts “on behalf” purchasing from another EU Country, there is the additional question of filling the 15.10 VAT exemption form: under which ownership is it filled? A solution is to fill it in the name of the Party, but with reference to whom is entitled to the exemption (the ERIC or the Member). Also this has to be cleared with the local tax authority, to avoid misunderstandings.

In principle, it may happen that one instrument purchased under tax exemption allowance is used (within the institutional activities of the ERIC) for commercial purposes within the allowed limited commercial activity of the ERIC. If the amount of commercial use is known in advance, the tax exemption can be required only for the remaining part (and the tax is paid for the commercial part already at the moment of purchase). If this amount is known only afterwards (and there is a track record of this use) the amount of due tax must be calculated and paid when the yearly accounting is made, and, again, it is advisable to detail the methodology and the procedure to keep the track record and to effect the payment with the local tax authority.

Concluding, all complex VAT exemption cases need to be clarified in advance with the relevant tax authorities. In some countries these authorities are structured at National and Regional levels, so it is very important that all levels are informed and aligned – in particular the entry and executive, local/regional levels.

Watch an ERIC Forum webinar “Procurement Rules, VAT Exemption Practices and Economic Activities” below. 

When planning for the use of tax exemptions, it is important that a detailed track-record is kept in the ERIC accounts. If the tax-exempt goods and services are not transferred in the property of the ERIC, but made available by a Party on behalf of a Member, it is important that this track record is kept in the accounts of the Party and reflected in the accounting/reporting of the ERIC. The auditing of the ERIC accounts should take note of all the items which are acquired within the tax-exemption area for the sole use of the ERIC.

The staff responsible for the operation/use of the goods/services purchased in tax exemption should know the conditions to which the use is subjected, both to track the eventual commercial use and to avoid “promiscuous” usage outside the remit of the ERIC (i.e. ensure that the use is within the “sole use of the ERIC”).

When the ERIC activities are hosted within a larger research institution, this may require some careful definition of operation frameworks. It could be recommended to record all VAT-related transactions in the annual reporting and auditing as separate information for the stakeholders.

The local/national tax authority will need to be informed of the start of activities of an ERIC. Being the ERIC Regulation relatively unknown, and its activities very different from those of a Firm and its tax exemptions different from those granted to an Embassy or a Consulate (the most common examples of tax-exempt “international Entities”) this will require a direct person-to-person involvement to explain the “rationale” of the ERIC and what is a Research activity. It is suggested to take this as a part of the “stakeholders outreach activities” including possibly an invitation for a site visit and/or a presentation of the activities of the ERIC. The meetings with the tax authorities and the competent Ministry of Finance aim at defining correct procedures to follow, possibly defining a “framework agreement” where correct procedures and ways of reporting are outlined.

It’s always a good idea to check the statute of the ERIC and the integrated internal regulations detailing correct procedures for tax exemptions. Most Statues have limits in the amounts allowed or in the extent of application.

Verify the specific wording of each ERIC Statute: does it limit the Regulation (e.g. excludes the Members, or sets a minimum exempt value? Possibly make specific reference to Internal Rules). See examples of ERICs Statutes below

Check the national language translation (of the Statute and the Regulations) is it correct in the relevant points?

Define, in internal regulations, any further scope, clarification or procedure (e.g. Does the ERIC “perimeter” include also “hubs” explicitly entitled to purchase in the name of the ERIC?).

Contact and inform directly and personally local Tax authorities implementing VAT and Excises to clarify that it is a “Tax Exemption.” Define procedure, between direct application or through a tax refund mechanism.

Ensure separate accounting, inventorying and auditing of exempted goods and services purchased both directly or indirectly, either in property or in availability. Define technical lifetime, detail use for sole ERIC activities and scope.

If the purchased goods may be used in part for (limited) commercial activities, define, in agreement with the Authorities, how this part will be subject to taxation.

For cross-border procurement, define with the Authority how to fill the required “EU 15.10 certificate” and which authority issues the visa confirming that the signatory is tax exempt (or exempts from the visa and informs the EU).