Executive Summary:
- Exemptions mandated by the VAT Directive do not constitute state aid because they cannot be imputed to Member States.
- Exemptions which are wider than those mandated by the VAT Directive are imputed to Member States and may constitute state aid.
- An exemption from output VAT confers a selective advantage even if input VAT cannot be deducted by undertakings.
Table of Contents:
- Introduction
- The scope of the VAT exemption
- Applicability of Article 107(1) TFEU
- Limitation of the temporal effects of the present judgment
Introduction
Directive 2006/112 harmonises to a large extent the tax base and tax rates of value-added tax levied by Member States. The Directive also lays down certain compulsory exemptions [as in the case of insurance and banking transactions] from the principle that the tax must be levied on all transactions [see, for example, Article 135 of the Directive]. Some other provisions allow Member States to request Council authorisation for exemption of certain goods or services from the tax base or standard tax rates [see, for example, Article 131 of the Directive]. While compulsory exemptions are imputed to the EU, exemptions which are granted at the request of a Member State are imputed to that Member State. This difference is important for the application of state aid rules.
The VAT system is self-enforcing in the sense that businesses that levy the tax have a strong incentive to declare to the tax authorities the revenue they collect because in this way they can subtract the VAT they have already paid on what they themselves have bought from other companies. So, input VAT can be subtracted from output VAT and only the net amount is paid to the tax authorities. However, if a company carries out “exempt” transactions such as insurance or banking it cannot subtract input VAT [although there are certain exemptions to this rule too].
The Austrian VAT law exempted, as required by the VAT Directive, banking transactions. However, an audit by the tax authorities in 2021 found that certain transactions within “***X***”, a banking group, did not qualify for the exemption. The banking group contested that finding. The court that was adjudicating the dispute asked the Court of Justice of the EU [CJEU] for a preliminary ruling on whether the exemption constituted state aid. A previous request on the same matter was deemed in May 2025 to be inadmissible by the CJEU [see C-460/24, Schoger]. Therefore, the current case, C-360/25, Schoger II, is the second request, after the referring court amended its question to the CJEU which rendered its judgment on 9 July 2026.1
The scope of the VAT exemption
The CJEU considered that in order to determine whether the exemption at issue in the Austrian VAT law constituted state aid it was necessary to identify precisely the scope of that exemption. According to the Austrian law that exemption would “also apply in respect of other services provided between undertakings primarily carrying out transactions relating to the banking, insurance, or pension fund sector, provided that those services are directly used to carry out those exempt transactions”.
The CJEU observed that, according to the Austrian VAT law, “(35) the undertakings to which the exemption at issue applied, namely ‘undertakings primarily carrying out transactions relating to the banking, insurance, or pension fund sector’, were understood broadly and also included undertakings which did not have a banking licence. Furthermore, in view of the difficulty of determining the use of the services provided by those undertakings ‘to carry out [the] exempt transactions [relating to the banking, insurance or pension fund sector]’, it was common practice of the Austrian tax authorities, at least during the tax period at issue, to exempt all the services provided between the undertakings concerned which were not already exempt under another provision of the [Austrian law]. The referring court mentions, by way of example, IT services, consultancy services or also restaurant or childcare services.”
“(36) Accordingly, it must be considered that, by its question, the referring court asks, in essence, whether Article 107(1) TFEU must be interpreted as meaning that an exemption from VAT of services, which are not otherwise exempt, provided between undertakings primarily carrying out transactions relating to the banking, insurance or pension fund sector, constitutes State aid within the meaning of that provision.”
It would appear that for reasons of administrative simplicity, all transactions of exempt undertakings were considered to be exempt, even though certain of those transactions taken in isolation were not exempt [e.g. catering]. In other words, Austria had widened the exemption mandated by the VAT Directive.
Applicability of Article 107(1) TFEU
The CJEU applied in turn each of the four criteria of Article 107(1) TFEU.
Imputability and state resources
“(38) First, as regards the State origin of the exemption at issue, it should be noted that that exemption does not fall within any of the exemptions exhaustively provided for by the VAT Directive and which must be interpreted strictly … Indeed, Article 135 of the VAT Directive, which provides for the only exemption allowed to undertakings in the banking, insurance and pension fund sectors …, refers only to certain transactions carried out by those undertakings, such as insurance and reinsurance transactions or the granting, negotiation and management of credit or the management of special investment funds, of which the transactions covered by the exemption at issue, as implemented by the Austrian tax administration, do not form part.”
“(39) It follows that the exemption at issue is imputable to the Austrian State. A tax exemption established by a Member State is imputable to the European Union, and not to that State, only if it merely reproduces a clear and precise obligation laid down in a directive …, which is not the case here.”
Therefore, a tax exemption must be mandated by EU law and must be applied as provided by EU law if it is not to be considered as state aid.
“(40) As regards the condition relating to the granting of the exemption at issue through State resources, which must also be satisfied in order to be classified as ‘State aid’ …, suffice it to recall that, according to settled case-law, the definition of ‘aid’ is more general than that of a ‘subsidy’ because it includes not only positive benefits, such as subsidies themselves, but also measures which, in various forms, mitigate the charges which are normally included in the budget of an undertaking and which thus, without being subsidies in the strict sense, are similar in character and have the same effect. Consequently, a measure by which the public authorities grant certain undertakings a tax exemption which, although not involving the transfer of State resources, places the recipients of the exemption in a more favourable financial position than that of other taxpayers amounts to State aid, within the meaning of Article 107(1) TFEU”.
Then the CJEU responded to the argument of ***X*** that it paid more tax because it could not deduct input VAT.
“(41) the impact on State resources is not called into question by the alleged higher tax burden on ***X*** due to the absence of any right of deduction attached to the exemption at issue.”
“(42) It is true that the existence of an exemption from VAT, such as the exemption at issue, precludes the right to deduct any input VAT paid, in accordance with Article 168 of the VAT Directive, which limits the deduction of VAT paid on goods and services to cases where those goods and services are used for the purposes of taxable transactions, and Paragraph 12(3)(2) of the UStG, which transposed Article 168 into Austrian law. In practice, that means that the VAT paid by ***X*** on any goods or services used to provide exempt services is borne by ***X***.”
“(43) Nonetheless, first, the examination of the granting of a measure by means of State resources is assessed by definition primarily at the level of the State concerned and its budget and not from the individual situation of the beneficiary of that measure. In the present case, it must be ascertained whether the tax revenue of the State is decreasing. Secondly, and in any event, the existence of State resources is interpreted as including cases where there is a sufficiently concrete economic risk of burdens being imposed on the State budget … Accordingly, it is the potential to reduce that revenue that is taken into account and not its actual reduction.”
Although it is not obvious, the CJEU is right that there is a “potential” revenue reduction for the state. Exempt undertakings do not charge output VAT but bear input VAT. The revenue from input VAT is paid to the state by the seller of the inputs. Say, an exempt company pays 5 of input VAT. Had it not be exempt, it would charge, say, 8 of output VAT [normally, revenue from output VAT is larger than what is paid on input VAT, otherwise the company would go bust because it would not be adding sufficient economic value through its transactions]. The company would then pay an extra 3 to the state. This is not surprising as tax exemptions mean loss of potential revenue for the state.
“(44) In the present case, …, the Austrian legislature itself highlighted the additional VAT revenue for the Republic of Austria” resulting from a change of the relevant Austrian provisions at issue.
Advantage
“(45) Secondly, so far as concerns the advantage which the application of the exemption at issue would procure and the selective nature of that advantage, it must be recalled that the criterion of advantage is understood broadly by the case-law, as including all measures which, whatever their form, are likely directly or indirectly to favour certain undertakings or are to be regarded as an economic advantage which the recipient undertaking would not have obtained under normal market conditions”.
Next, the CJEU recalled that “(46) where a tax aid scheme applies on an annual or periodic basis, the Commission need only demonstrate that the aid scheme is such as to favour its beneficiaries, by ascertaining that the scheme, taken as a whole, is, given its particular characteristics, capable of resulting, at the time of its adoption, in the tax liability being lower than it would have been if the general tax regime had been applied, irrespective of whether, in view of those characteristics, that institution is not in a position to determine, in advance for each tax year, the precise level of taxation for that tax year. It is at the stage of the possible recovery of the aid granted on the basis of that aid scheme that the Commission is required to determine whether that scheme has actually conferred an advantage on its beneficiaries taken individually, since such recovery requires the exact amount of aid actually enjoyed by the beneficiaries in each tax year to be established”.
This is also true in the case of exempt VAT transactions. It is possible that in a particular period a company makes a large purchase, pays a large amount of input VAT. But in the same period it makes only a few sales, so that had it charged output VAT, the tax revenue it would have owed to the state would have been smaller than what it already paid for its input.
“(47) As regards an exemption from VAT such as the exemption at issue, it should be considered that its application is capable of procuring an advantage for the undertakings providing the services covered by that exemption, which are, …, legally the beneficiaries of that exemption. Those undertakings have an advantage over undertakings to which the exemption at issue does not apply, and which are therefore required to charge VAT, so far as concerns the supply of the same services to undertakings which, as in the present case, are not entitled to deduct input VAT, in view of the exemption of many of their services under Article 135 of the VAT Directive”.
“(48) By contrast, …, it is not necessary, at the stage of classification as ‘aid’ and in the case of a potential tax aid scheme such as that at issue in the main proceedings, to ascertain, in each specific case, the effect of being unable to deduct the input VAT which is connected with the exemption at issue, and thus to ensure that the reduction in the tax burden resulting from that exemption is not offset, or even overcompensated, by the tax burden linked to the VAT paid on the goods and services used to provide the exempt services, to the point of being disadvantageous for the undertakings concerned. That is all the more so since such a set-off and its extent depend on the occurrence of random and variable circumstances depending on the taxpayers, in particular, in the present case, the use of goods and services subject to VAT and the extent of that use.”
“(49) The considerations set out in the preceding paragraph apply both where the Commission is responsible for ruling on the existence of aid, as was the situation in the case which gave rise to the judgment of 4 March 2021, Commission v Fútbol Club Barcelona (C-362/19 P, EU:C:2021:169), and where the national court must determine the existence of aid, as in the present case, since the justification put forward by the Court in that judgment is also applicable to the national court. It is a question, in both cases, of preventing Member States which implement aid schemes without prior notification, in breach of their obligation under Article 108(3) TFEU, from being favoured over those which comply with that obligation, which would be the case if the Commission or the national court were required to verify, for the purpose of assessing the existence of an aid scheme, on the basis of data collected after the adoption of that scheme, whether the advantage has actually materialised or has been offset by the disadvantages”.
In the paragraph above, the CJEU cited the landmark judgment in Fútbol Club Barcelona. In that judgment the CJEU ruled that, in order to determine the presence of advantage, the Commission had to take into account all relevant aspects arising from the particular tax status of an undertaking or class of undertakings. At that time Spanish football clubs had a different legal status than other companies and while they were classified as non-profit, they were also deprived of the possibility of deducting certain expenses from their income. In paragraphs 63 & 64 of that judgment, the CJEU famously ruled that “it is necessary to consider all points of law or fact which are attached to that measure, in particular, the profits and costs resulting therefrom … and, therefore, to carry out an assessment of that measure as a whole, taking into account all its characteristics” and that “the Commission has a duty to carry out a global assessment of the aid measure at issue”. In the present case, the CJEU could have simply ruled that the exemption from output VAT, in combination with the non-deduction of input VAT, confers a net advantage because in general output VAT is larger than input VAT. Yet, in paragraph 54 of the present judgment, the CJEU itself refers to the specific link between the exemption from output VAT and non-deductibility of input VAT.
But the CJEU went on to reject another Austrian argument that the beneficiary undertakings operated at a competitive disadvantage.
“(50) In order to respond to the Austrian Government’s argument that the exemption at issue offsets specific charges due to the structural disadvantages imposed on some of the undertakings concerned, it must be borne in mind that the fact that a Member State seeks to approximate, by unilateral measures, the conditions of competition in a particular sector of the economy to those prevailing in other Member States cannot deprive the measures in question of their character as aid”.
Selectivity
“(51) As for the condition relating to the selective character of the advantage granted by the measure concerned to its beneficiaries, the Court has consistently held that, in order to classify a tax measure such as the one at issue in the main proceedings as ‘selective’, it is necessary to identify, initially, the reference framework, that is to say, the ‘normal’ tax regime applicable in the Member State concerned, and to demonstrate, thereafter, that the tax measure at issue is a derogation from that reference framework, in so far as it differentiates between operators who, in the light of the objective pursued by that reference framework, are in a comparable factual and legal situation. The concept of ‘State aid’ does not, however, cover measures that differentiate between undertakings which, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation, and that are, therefore, a priori selective, where the Member State concerned is able to demonstrate, subsequently, that that differentiation is justified, in the sense that it flows from the nature or general structure of the system of which those measures form part”.
“(52) In the present case, the reference framework consists of the general system of charging VAT, that is to say, a harmonised reference framework reducing the fiscal autonomy of the Member States.”
“(53) The derogation from that harmonised reference framework lies in the fact that, pursuant to the second sentence of Paragraph 6(1)(28) of the [Austrian VAT law], which has no basis in the VAT Directive, services supplied by a particular category of undertakings to the same category of undertakings, namely ‘undertakings primarily carrying out transactions relating to the banking, insurance or pension fund sector’, are exempt from VAT, whereas those services are subject to VAT when they are supplied by undertakings not falling within that category. The beneficiary undertakings of the exemption at issue are, in the case of the services concerned, namely all those – which are not otherwise exempt – provided to that type of undertaking, such as those referred to, by way of example, in paragraph 35 above, in the same situation as all the other suppliers who provide those services.”
“(54) The beneficiaries of the exemption at issue are understood as not including only the undertakings with a banking licence and subject on that basis to specific rules and constraints, a fortiori in the case of transactions which do not necessarily have a link with banking transactions, such as those at issue in the main proceedings. In addition, the fact that those beneficiaries do not have the right to deduct the VAT paid on the input transactions likewise does not enable them to be distinguished from the other suppliers of services concerned, since that absence of the right to deduct is specifically linked to the exemption at issue. A legal consequence which follows for the service provider beneficiaries of the exemption at issue only from the application of the measure under examination is not such as to show that they are in a different situation from that of service providers who are not beneficiaries of that measure.”
“(55) As regards the justification for the differentiation concerned by the nature or general scheme of the system of which the exemption at issue forms part, it should be borne in mind that, according to recital 5 of the VAT Directive, ‘a VAT system achieves the highest degree of simplicity and of neutrality when the tax is levied in as general a manner as possible and when its scope covers all stages of production and distribution, as well as the supply of services’.”
“(56) Accordingly, even though it will be for the referring court to ascertain whether there is any justification in the light of all the relevant factors of the dispute before it, the preservation of fiscal neutrality, the prevention of overlapping taxes and the administrative simplification put forward by the Austrian Government in its observations do not appear capable of justifying the differentiation at issue. Such justifications are associated by the VAT Directive with the collection of VAT in as general a manner as possible and not with the possibility of providing for exemptions, it being noted, moreover, that, as observed in paragraph 38 above, none of the VAT exemptions exhaustively provided for by that directive corresponds to the exemption at issue.”
Distortion of competition
“(58) Thirdly, as regards the condition that the measure concerned must distort or threaten to distort competition, it is necessary, in accordance with the wording of Article 107(1) TFEU, not to establish an actual distortion of competition, but only to examine whether that measure is liable to distort competition … Such a distortion of competition results, in the present case, from the advantage enjoyed by the exempt undertakings, and, moreover, the corporate customers, all of which operate in a liberalised sector. According to settled case-law, an advantage granted to an undertaking operating in a competitive sector may serve to determine that the measure has a real or potential effect on competition … In the present case, subject to verification by the referring court, in the absence of specific rules or constraints on the undertakings providing the services at issue, those services may be regarded as being provided in a competitive environment.”
Affectation of trade
“(59) Fourthly, as regards the condition that the measure concerned must be liable to affect trade between the Member States, it follows in the present case from the advantage procured by the exemption at issue. The Court has consistently held that when aid granted by a Member State strengthens the position of an undertaking compared with other undertakings competing in intra-Community trade, the latter must be regarded as affected by that aid”.
“(60) The fact that the exemption at issue also benefits taxable persons established in other Member States is not such as to call into question the fact that it is liable to affect trade between the Member States. All the undertakings providing services to undertakings primarily carrying out transactions relating to the banking, insurance or pension fund sector and which do not benefit from the exemption at issue, whether they are established in Austria or in other Member States, have less chance of providing the services at issue”.
On the basis of the above reasoning, the CJEU concluded that “(61) an exemption from VAT of services, which are not otherwise exempt, provided between undertakings primarily carrying out transactions relating to the banking, insurance or pension fund sector, constitutes State aid”.
Limitation of the temporal effects of the present judgment
The Austrian Government requested that the judgment be limited to events subsequent to the date of the judgment on the grounds that the finding of the existence of state aid would have “significant consequences” for the Austrian banking and insurance sector, since all the transactions exempted under the exemption at issue would have to be reassessed and could give rise to “vast numbers” of disputes before the national courts. Moreover, the undertakings concerned were said to have acted in “good faith”.
The CJEU responded by reiterating that “(63) it is only exceptionally that the Court may, in application of the general principle of legal certainty inherent in the EU legal order, be moved to restrict for any person concerned the opportunity of relying on a provision which it has interpreted with a view to calling into question legal relationships established in good faith. Two essential criteria must be fulfilled before such a limitation can be imposed, namely that those concerned should have acted in good faith and that there should be a risk of serious difficulties, with those criteria being cumulative”.
“(64) Accordingly, the Court has taken that step only in quite specific circumstances, notably where there was a risk of serious economic repercussions owing in particular to the large number of legal relationships entered into in good faith on the basis of rules considered to be validly in force and where it appeared that individuals and national authorities had been led to adopt practices which did not comply with EU law by reason of objective, significant uncertainty regarding the implications of European Union provisions, to which the conduct of other Member States or the European Commission may even have contributed”.
“(65) As regards the criterion relating to the existence of a risk of serious economic repercussions, it should be recalled that it is for the Member State seeking to limit the temporal effects of a judgment on a preliminary ruling to produce, before the Court, figures showing the risk of such repercussions”.
“(66) In the present case, the Austrian Government merely refers to significant consequences, without any details relating to the extent of the services between undertakings in the banking, insurance or pension fund sector, benefiting from the exemption at issue, and thus of the potential impact of an obligation to pay VAT relating to those services on that sector.”
“(67) In any event, and without prejudice to the competences of the Commission concerning State aid, tax periods which have been definitively closed should not be reopened in national court proceedings following the present judgment … The interpretation which the Court gives to a rule of EU law, in the exercise of the jurisdiction conferred on it by Article 267 TFEU, may and must be applied to legal relationships which arose and were established before the judgment ruling on the request for a preliminary ruling where, in other respects, the conditions for bringing a dispute relating to the application of that rule before the national courts having jurisdiction, inter alia as regards time limits for bringing proceedings, are satisfied”.
“(68) In those circumstances, it must be held that the criterion relating to the risk of serious difficulties is not fulfilled, with the result that it is not necessary to ascertain whether the criterion relating to the good faith of those concerned is fulfilled.”
The CJEU concluded that “(69) there is no need therefore to limit the temporal effects of the present judgment.”
