The impact of subsidies on the right to deduct input VAT : the Spanish experience

On 14 May 2003, the European Commission brought an action against Spain before the ECJ on the grounds that the Spanish VAT rules limiting the right to deduct input VAT as a consequence of the collection of subsidies conflict with the Sixth Directive. The challenged Spanish VAT provisions have been effective since 1 January 1998 and are based on the option set out in the Sixth Directive, allowing Member States to include in the denominator of the pro rata fraction the subsidies that do not form part of the taxable amount. In this article, the authors analyse the meaning of "subsidy", and summarize the main discrepancies between the Sixth Directive and the Spanish provisions, in order to evaluate the changes of success of the Commission's action before the ECJ.