08.09.2023 | KPMG Law Insights

On the Differentiation of the Concept of Enterprise in Value Added Tax and State Aid Law

The following text is a contribution from our newsletter Cross Section Science.

What is an economic activity or an enterprise characteristic under German VAT law does not necessarily have to be so under state aid law (and vice versa). In practice, for example, the classification of a company’s activities as “non-economic” under state aid law can lead to the conclusion of a non-economic activity in the VAT sense and thus, in particular, to a negation of the concept of an enterprise under tax law. The terms of the enterprise in the income tax sense, which are also to be interpreted independently, are not the subject of this consideration. The following article addresses the question of why a transfer of the terms to the respective areas of law should be avoided despite points of overlap. This is because the interpretation of the concept of an enterprise is autonomous. In determining corporate status, tax law must be strictly separated from state aid law.

1. the prohibition of state aid

The starting point is the fundamental prohibition of state aid under Art. 107 Para. 1 of the Treaty on the Functioning of the European Union (TFEU). Accordingly, unless otherwise provided by law,

“any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

The prohibition of state aid thus only applies if there is an “undertaking”. According to state aid law, an enterprise is considered to be an enterprise if it carries out an “economic activity”. If both economic and non-economic activities are carried out, the legal consequences of the EU prohibition of state aid pursuant to Section 2.1.1. may apply. Rn. 19 of the Union Framework for State Aid for Research and Development and Innovation of 28.10.2022 (2022/C 414/01) (hereinafter the R&D Framework) should be avoided by “clearly separating the non-economic and the economic activities and their costs, financing and revenues […] so that there is no risk of cross-subsidization of the economic activity” (so-called separation calculation).

The “raison d’être” of the prohibition under state aid law is to prevent subsidy races between member states.[1]

Its purpose, in contrast, is not to control member state money spending behavior.[2]

The interpretation of the constituent elements is always to be interpreted in the light of this purpose and is therefore not possible with the help of definitions of terms from other areas of law. Conversely, concepts interpreted in the light of EU state aid law cannot be transferred to other areas of law. This also applies to the concept of “company”.

For this purpose, see the following:

2. distinction between the concept of “undertaking” under VAT law and the concept of “undertaking” under state aid law

The classification of activities under state aid law is not congruent with the classification of the areas of activity under tax law, either in terms of content or with regard to their respective legal or tax consequences. It is true that both areas of law use the terms “economic activity” and – associated with this – “enterprise”. However, the classification of an activity as an economic activity or a non-economic activity and the definition of an “enterprise” is handled differently in the respective jurisdictions. The consequence of this is that, from the point of view of tax law, a business or an institution can be classified as an “enterprise” on the basis of economic activities, whereas under state aid law the same activities are deemed to be non-economic activities and thus the concept of an enterprise is not fulfilled.

This results from the following:

3. different definitions of the term “company

The concept of an undertaking within the meaning of state aid law initially covers all legally independent entities that are economically active, irrespective of their legal form and irrespective of the way in which they are financed.[3] The term “undertaking” is used in the context of state aid law.

With regard to the distinction between economic and non-economic activities, the European Court of Justice has stated that the term “economic activity” covers any activity that consists in offering goods and services on a market. A market reference is generally to be affirmed if the activity does not represent a purely sovereign task fulfillment and is in principle also provided by a private company. Indications for this are, among others, the remunerative nature of the activity as well as the possibility of making a profit; however, neither of these is mandatory.[4] The market connection is generally established if the activity does not represent a purely sovereign task fulfillment and can also be performed by a private company.

In contrast, the concept of an enterprise under value added tax law pursuant to Sec. 2 (2) of the German Commercial Code (§ 2 Abs. 1 UStG presupposes the following:

An entrepreneur is anyone who independently carries out a commercial or professional activity. (…). Commercial or professional is any sustained activity for the purpose of generating income, even if the intention to make a profit is absent or an association of persons acts only towards its members. (…)

Moreover, § 2 para. 2 UStG provides for exceptions according to which the (independent) corporate status is not given, namely if natural persons, individually or jointly, are integrated into a company in such a way that they are obliged to follow the instructions of the entrepreneur or if a legal entity is integrated financially, economically and organizationally into the company of the controlling company according to the overall picture of the actual circumstances (fiscal unity).

If one compares the concepts of “enterprise” under tax law and state aid law, it is noticeable that the concept of enterprise under tax law – unlike that under state aid law – is based firstly on the type of financing and secondly on the legal form or integration into structures. While the tax law concept to the third party is oriented to a “commercial -” and “professional activity”, the state aid law concept knows “only” the pure market reference.

The requirements for the concept of an enterprise are therefore not congruent.

4. fiction of non-economic activity under the R&D framework in state aid law

In addition, the concept of an enterprise under state aid law is subject to special rules that do not apply under national VAT law. These lie, on the one hand, in the above-mentioned separation calculation and the associated assessment that an entity can be both economically and non-economically active. Second, special cases arise from the R&D framework.

The R&D framework assumes for the benefit of research institutions and infrastructures that certain activities are classified as non-economic and thus not relevant under state aid law, despite the existence of a market link. In the area of non-economic – and thus aid-free – activities, the R&D framework provides, on the one hand, for primary non-economic activities and, on the other hand, for economic activities that are assimilated to non-economic activities. In addition, economic activities can also be classified as non-economic activities via the so-called 20% clause of the R&D framework (cf. point 20 et seq. of the R&D framework).

All of these activities are ultimately classified as non-economic with the consequence that the concept of an enterprise is not present (cf. para. 20 p. 1 of the R&D Framework). However, national tax law does not provide for such privileges in favor of research institutions and infrastructures. In this respect, one or all activities of a research institution can be classified as “economic” from a tax law perspective, whereby the concept of an enterprise is affirmed under tax law, while the same activity is classified as non-economic under state aid law and the concept of an enterprise is denied.

Knowledge transfer with the associated exploitation of research results serves as a particularly relevant example here. This is basically to be regarded as an economic activity and is accordingly also classified as an economic activity for VAT purposes. Under state aid law, however, this transfer of knowledge, despite its “economic viability”, counts as a non-economic activity of a research institution, insofar as the profits from these activities are reinvested in the primary activities of the research institution (cf. point 20 b) of the R&D Framework).

Consequently, it is also evident here that the standards for assessing corporate status diverge. This is also correct, because tax law and state aid law pursue different objectives, in the light of which the concept of “enterprise” or economic efficiency must be interpreted.

For this purpose, see the following:

5. autonomous interpretation due to different objectives in tax and state aid law

State aid law is based on the concept of “undistorted competition”. Supply and demand should find each other in the common market on the basis of economic, technical and financial needs, without state intervention distorting this process. Therefore, measures – financed by state funds – which mean a “price reduction compared to the market price” for the companies concerned are generally suspected of being (illegal) state aid.[5] The state aid law is based on the principle of “undistorted competition”.

In tax law, on the other hand, there is precisely no “market”. Rather, the state is “omnipresent”, since it subjects the acquisition, holding and consumption of income and assets to taxation on a broad basis. In this context, the supporting aspects are the principles of tax justice or equality, which are already derived from constitutional principles (cf. Section 85 AO).[6]

As a consequence, the identification of the concept of an enterprise in VAT law, which is linked to a legal or economic act, the performance of a legal transaction or an economic or commercial transaction, must be based on a different standard than in state aid law.

The ECJ therefore fills out the indeterminate legal concept of an undertaking strictly in line with the protective purpose of the competition rules, namely to promote entrepreneurial competition where it exists or can exist. If there is no market that functions according to competition principles – as in the case of sovereign activities, sports and culture, and services provided according to the principle of solidarity – or if the behavior of the person involved cannot influence the competitive conditions at all (as in the case of private final consumption), competition law is also not applicable.[7]

Conversely, in tax law, it is not necessarily possible to conclude that a company qualifies as a taxable entity under state aid law, since the examination under state aid law follows a completely different background and does not take into account the relevant principle of tax equality, in particular due to the exceptions under the R&D framework and the possibility of separation accounting.

These highlighted peculiarities in state aid law also offer the possibility of using an acquisition in both the economic and non-economic spheres. For this purpose, see the following:

6. possibility to use acquisitions in both economic and non-economic spheres in the law on subsidies

Whereas under tax law it is necessary to make a clear allocation, possibly on a pro rata basis, as to whether an acquisition is made for the entrepreneurial area or for the non-entrepreneurial area, under state aid law acquisitions in the non-entrepreneurial area can also be used in the entrepreneurial area, e.g. for contract research. This is not prohibited under state aid law; all that is then necessary is an internal separation calculation. If an acquisition was fully allocated to the business for VAT purposes with full input tax deduction and if a non-business use later arises, this non-business use is regularly taxed.

7. conclusion

According to the above, the concept of an enterprise must be interpreted autonomously in the light of the respective area of law. This means that the classification of activities as economic or as “undertakings” under state aid law does not necessarily mean that an assessment as an “undertaking” is also correct under tax law and vice versa. Rather, an independent test is required.

[1] ECJ 720/79, ECR. 1980, 2671 para. 25 f. – Philip Morris.

[2] Bartosch, 3rd ed. 2020, art. 107, para. 2.

[3] So-called “functional concept of undertaking,” cf. ECJ, judgment of April 23, 1991, Case C-41/9;

MüKo WettbR/Arhold, 4th ed. 2022 TFEU Art 107 para. 496.

[4] ECJ, judgment of 18.06.1998, Rs. C-35/96, Commission v. Italy, para. 36; ECJ, judgment of 04.03.2003, Rs. T-319/99, FENIN, para. 36; MüKo WettbR/Arhold, 4th ed. 2022 TFEU Art 107 para. 498.

[5] Marquart, IStR 2011, 445 et seq. N.

[6] Koenig/Hahlweg, 4th ed. 2021, AO § 85 para. 8.

[7] MüKo WettbR/Säcker/Steffens, 3rd ed. 2020, TFEU Art. 101 para. 8 m. w. N.

Other innovations in the Union framework

A major innovation in the Union framework concerns the on-lending of grants:

As a rule, universities and research institutions find themselves in a so-called sandwich position, namely between the state, which gives or finances the grants, and the company/third party that is ultimately to receive the grants. In this context, universities/research institutions assume the function of a “body forwarding the grants”. In order to provide relief under state aid law for universities and research institutions in such a situation, the EU Commission does not consider research institutions and universities to be recipients of state aid if they only act as intermediaries and pass on the total amount of public funding and any advantages (e.g. interest benefits) possibly obtained through such funding to the final recipients.

However, this privileging only occurs at the level between the state and higher education/research institutions.

Dr. Anke Empting, KPMG Rechtsanwaltsgesellschaft mbH, Düsseldorf

T 0211 4155597-161;

Aline Heurley, KPMG Rechtsanwaltsgesellschaft mbH, Düsseldorf

T 0211 4155597-160;

Julia Paul, KPMG Rechtsanwaltsgesellschaft mbH, Düsseldorf

T 0211 4155597-163;


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