Tax-exempt status of service companies vs. EU state aid law? - Advocate General’s opinion in case
C-477/25

The German Federal Fiscal Court (Bundesfinanzhof; BFH) submitted a question to the Court of Justice of the European Union (CJEU) by decision of May 22, 2025 (case no. V R 22/23), asking whether the tax advantages for service companies under Section 57 (3) of the German Fiscal Code (Abgabenordnung; AO) are compatible with EU state aid law. The case is pending before the CJEU as case C-477/25. On October 15, 2026 the Advocate General submitted his opinion. This opinion forms an important basis for the judgment of the CJEU expected in the first half of 2027. The BFH will then resume the suspended appeal proceedings under case no. V R 22/23; in that respect it will be bound by the interpretation given by the CJEU.

Initial situation: cooperation with service companies

The questions affect in particular service companies in the health sector (hospitals and care), but also social institutions and the areas of research and culture.

In these structures such service companies perform general administrative services for one or more non-profit corporations, such as financial accounting, controlling, information technology, personnel administration, procurement (specific, e.g. medicines, or general, e.g. consumables) or hygiene (e.g. laundry or building cleaning), sterile goods, catering or facility management services.

Such service companies do not themselves perform a non-profit activity, but under Section 57 (3) AO they can also realize their tax-privileged purposes through a planned cooperation with other tax-privileged corporations and thus themselves benefit from the tax advantages for non-profit corporations.

Advocate General’s opinion

At its core the Advocate General’s opinion contains the following suggestions as to how the preliminary questions before the CJEU can be answered:

• Corporate income tax and trade tax: The exemption from corporate income tax and trade tax for service companies within the meaning of Section 57 (3) AO does not confer a selective advantage and therefore does not constitute state aid within the meaning of Article 107 (1) TFEU. 
  According to the Advocate General, it is not sufficient to focus solely on the marketable services; decisive are the non-profit law constraints, such as the lack of profit-making intent, the restricted use of funds and the binding of assets, which distinguish service companies from profit-oriented enterprises. Referring to the Paint Graphos case (case C-78/08), the Advocate General therefore does not see service companies as being in a comparable situation to taxable enterprises.
• Value added tax: By contrast, the application of the reduced VAT rate to services of service companies may constitute a selective advantage and thus state aid. 
  Article 98 in conjunction with Annex III No. 15 of the VAT Directive allows for benefits for non-profit organizations with charitable purposes in the field of social protection. However, the Advocate General sees EU-law concerns about benefiting, by means of Section 57 (3) AO, all service activities for all non-profit purposes. The mere non-profit status of the recipient is not sufficient, in his view, to justify granting the reduced VAT rate. Doubts are expressed as to the admissibility of favoring marketable services. In that respect a state aid could exist which would qualify as a “new aid” and thus be subject to the obligation of prior notification to the European Commission.

Practical implications

There are therefore good chances that the income tax exemptions for service companies within the meaning of Section 57 (3) AO will remain unchanged. The importance of complying with the non-profit law requirements by the service company is underlined. Ultimately, however, the CJEU’s decision and the subsequent decision of the BFH must be awaited. If the state-aid issue is not confirmed, the BFH will still need to rule on the actual initial question, namely the statutory requirements in the articles of association for the application of Section 57 (3) AO.

More critical is the answer to the question whether the reduced VAT rate for services of such service companies supplied to other non-profit organizations can remain in the general scope as hitherto. If the CJEU (and subsequently the BFH) follows the recommendations in the Advocate General’s opinion, there is strong evidence to suggest that the reduced VAT rate would be limited to services in the areas of social welfare and medical treatment. In particular, general services would thus be subject to the standard VAT rate. 

This would have serious consequences, for example in the hospital sector: if, under the current situation, a general purchasing company can claim full input VAT on procured goods/services and recharge these goods/services to the non-profit hospital at the reduced VAT rate, this recharge might in future have to be made at the standard VAT rate. Due to the hospital’s lack of input VAT deduction, this would result in a material additional burden. The delimitation to services in the areas of social welfare and medical treatment would be questionable, e.g. whether hygiene, sterile goods or catering services to the hospital could be included, since these have at least a proximity to patient care, which does not apply to general administrative services.

Risks in existing structures should therefore be reviewed. If new structures are established, these risks should be taken into account. Here too, the decisions of the CJEU and the BFH remain to be awaited. Due to the mandatory provisions of the VAT Directive, the national legislature’s scope is limited; the mere recognition of the service company as non-profit is in any case not sufficient to justify application of the reduced VAT rate.