Congratulations, great news! 🎉 You have received on grants to boost your business activities. That’s a great boost to your business growth. But now the question arises: do you actually have to pay taxes on those grants? And how do you deal with this in your accounting?
Don’t worry, we are happy to explain it to you step by step. Let’s look at the different types of grants and what the tax implications are for each type. 🔎
The basic principle: grants are taxable
In principle, grants you receive on your business are taxable. They are considered taxable income and must therefore be included in your returns. Moreover, they are also included when calculating your social security contributions.
Attention!
To prevent subsidy funds from lower authorities (such as regions or cities) unintentionally flowing back to the federal government through taxes, certain grants are exempted from taxes!
Three categories of grants
There are roughly three types of grants, each with their own tax treatment:
- Fully exempted grants
- Partially exempted grants
- Fully taxable grants
Let’s take a closer look at each type.
1️⃣ Fully exempt grants
These grants enjoy full tax exemption and are therefore not subject to taxes or social security contributions. These are usually grants awarded by recognised national or international settings with the aim of rewarding or supporting exceptional performance in the fields of science, art or literature.
An example of a fully exempted grant is a prestigious price won for your pioneering scientific research.
For more info on the legal basis of these exemptions, click here.
2️⃣partially exempted grants
In some cases, you can enjoy a partial tax exemption on your grant. This is the case when you receive a grant from an institution that is not on the list of recognised settings. Then a partial exemption of up to EUR 4,680 (income year 2023) applies if it is an institution with public power or non-profit organisation, and no quid pro quo is expected from you.
The body awarding you the grant will also be able to give you more information on its taxability!
Attention!
You do not have to pay social security contributions for these partially exempted grants.
3️⃣ Fully taxable grants
Finally, there are grants that are fully taxable, just like ordinary income from your self-employed activities. This is the case when the subsidy is granted as remuneration for a performance or services you have provided specifically.
You can also always check with the body paying out the grant, they will also be able to help you question whether or not the grant is taxable.
Fully taxable? Well then you can put the grants in your accounts as if they were ordinary income. They will be taxed just as you create a sales invoice to a customer, on which you then pay social security contributions and personal income tax.
Fortunately, these grants are outside the scope of VAT, so no VAT has to be paid on them.
Stay up to date with Dexxter 🤝
Be sure to view our article on how to process grants in your accounts (from Dexxter)!
Want to stay up to date from the new tips & tricks on accounting and entrepreneurship? Then be sure to follow us on our socials! 📬
At Dexxter, we acknowledge that accounting and taxes can’t be easy for many entrepreneurs. That’s why we provide user-friendly tools and accessible information, so you can focus on what really matters: pursuing your passion and growing your company.
Did you know?
Want to learn more about entrepreneurship and accounting? Then be sure to follow a free webinar and/or course!
