How to handle energy subsidies when it comes to taxes?

On 21 February, the Slovak Ministry of Economy announced another call for applications for subsidies to cover additional costs due to increases in gas and electricity prices. The purpose of the call is to mitigate the impact of high-energy prices negatively affecting businesses affected by the previously mentioned prices.

A brief rundown of the conditions to obtain an energy subsidy

Enterprises that have established a point of consumption for electricity and/or gas, after meeting other specific conditions set out in the call, can submit applications for energy subsidies for the period of January all the way to March 2023 through the slovensko.sk portal that is until the end of June 2023. The maximum amount of energy subsidy is EUR 200 000 per month per company, with up to EUR 279.8 million set aside for this purpose. All the necessary information on energy subsidies is available in a simple and comprehensible form on the website of the Ministry of Economy of the Slovak Republic.

Detailed information about the call in the article by Grant Thornton partner Filip Tichý

How to tax the energy subsidy received?

In this article, we will take a closer look at the tax aspects of energy subsidies, as well as the tax implications of remitting a portion of the energy subsidy to tenants.

1. Income tax

From an income tax perspective, energy subsidies constitute taxable income, making energy subsidies different from most of the previous subsidies provided during the corona virus pandemic under the so-called first aid measure. However, we do not consider this fact to be tax disadvantageous in principle. Since in almost all cases, when the exemption was applied to subsidies, it was necessary to exclude it from tax expenses, since the expenses related to such an exempt subsidy in the same amount, thus making the subsidy tax neutral and the exemption did not represent the expected tax benefit. In the case of energy subsidies, although there is no exemption of income from tax, there is also no exclusion of tax expenses paid from the energy subsidy, since the energy subsidy is a form taxable income.

2. Value added tax

Energy subsidies do not count as a subsidy nor contribution received nor to be received by the supplier towards the price of the goods or services in VAT terms and are therefore not included in the tax base. That being the case, the receipt of the energy subsidy itself has no impact on VAT. Not even the fact that the subsidy may affect the price of the goods or services supplied by the subsidised entity, would be sufficient to make the subsidy taxable.

In order for a subsidy to be directly linked to the price of supplies, it is necessary for it to be specifically paid to the subsidised entity for the purpose of providing certain goods and services. Energy subsidies, however, are to be regarded as operating subsidies, meaning that they cover part of the normal costs of the undertaking, but are not provided in addition to the price of the supply, even though they may indirectly affect the cost of the goods or services supplied by the subsidised entity. For this reason, energy subsidies are excluded from the VAT regime.

Please note that what was mentioned above does not apply, for example, to compensation received by energy suppliers on energy prices due to the application of regulated energy prices for regulated entities such as households under Slovak Government Regulations. Such subsidies to energy prices are subject to VAT for energy suppliers and the subsidy received is considered to be at an amount, which includes VAT.

3. Redistribution of energy subsidies to tenants

In the case of rental property, it often happens that the proprietor requires, in addition to the rent, a separate payment for the exact amount of electricity, gas, water or heat supplied for each period of a repeated granted rental of the property. However, the tenant cannot apply for an energy subsidy to cover the additional costs due to the increase in gas and electricity prices, because the point of consumption has been set up by the proprietor.

If the proprietor decides to compensate the tenant for high-energy prices after the VAT liability arose, we recommend that such compensation be treated as a price discount, in other words a reduction in the price of the goods or services after the VAT liability has arisen.

In such a case, the proprietor, who is subject to VAT, has basically two options:

1. Issue a credit note with VAT within 15 days of the end of the calendar month in which the decision on the discount was taken and correct the original tax base and VAT; or
2. The proprietor agrees in writing with the tenant that the tax base and tax will not be corrected - this option can only be applied if the tenant is the VAT payer. In this case, we recommend that a credit note is prepared for accounting purposes without VAT, but a credit note as such is not shown in the VAT statements.

Please note that depending on the VAT treatment of the composite lease, the invoicing of energy may be VAT inclusive, but it is also possible for it to be VAT exempt. In the case of exemption, a credit note is issued when the energy subsidy is reallocated without VAT.

A credit note issued because of a reduction in the price of energy then reduces the taxable income (revenue) of an enterprise.