Corporate income tax duty of the municipality for advertising exploitation rights

On 1 November 2023, the Court of Appeal of 's-Hertogenbosch ruled in two cases on the entrepreneurship of a municipality with regard to granted advertising exploitation rights. The Court of Appeal is of the opinion that the municipality runs a business for the granted exploitation rights and that the government tasks exemption does not apply to the result achieved with the granting of exploitation rights. Also, when drawing up a fiscal opening balance sheet, there is no room for the activation of an item 'current contracts'.

Background

On 1 January 2016, the Act on the Modernisation of Corporate Income Tax Obligation for Public Enterprises was introduced. From that moment on, it must be assessed whether there is a corporate income tax liability for each (clustered) activity of a public entity. Similarly, with regard to the activities of municipalities, it must be assessed whether they qualify as a material undertaking and therefore lead to the obligation to pay corporation tax. These rulings come after the municipalities filed an appeal against the judgement of the District Court of The Hague of 1 November 2022. In view of the similar cases and content of both judgements, we will deal with only one of the two judgements below.

Dispute

The dispute was whether the municipality was running a business by granting exploitation rights for advertising and, if so, whether the conditions of the exemption from public duties were met. If there is a company and the government tasks exemption does not apply, the amount of the taxable profit is in dispute.

The Court of Appeal ruled that the municipality's activity consists of granting, in return for remuneration, an exclusive right to the operators to exploit objects in the public space for advertising purposes and that there is no question of an activity comparable to the letting of immovable property.

The municipality's primary position is that the activities of 'granting exploitation rights' and 'management of public space' must be assessed in conjunction with the question of whether there is an undertaking. Next, it took the view that, on balance, those clustered activities were on a long-term loss-making basis, with the result that there was no question of an undertaking. In the alternative, the municipality takes the view that the activities do not constitute a material undertaking, since they do not constitute more than normal asset management. The municipality substantiates this by arguing that it does not perform any work for the activity that can be regarded as work-plus and/or creates 'added value'. According to the municipality, its activities are comparable to the letting of immovable property because in both cases 'space' is made available.

In the further alternative, the municipality takes the view that the results from the grant of operating rights are not taxable, because they are subject to the exemption from public duties. Because the interested party is the only party that can dispose of the relevant municipal land (on which, for example, billboards are placed) and municipal objects to which the advertisement is attached (such as lampposts and bus shelters), there are no private parties that carry out comparable activities. According to the municipality, this is a government task with which it does not compete.

Finally, the municipality took the view that, in the event of a company, both the current contracts with advertising operators and the advertising media and objects that it owns may be included in its opening balance sheet for tax purposes as of 1 January 2016. According to the interested party, this leads to the conclusion that there was a loss in 2016.

Judgement of the Court of Appeal

With regard to the primary position, the Court of Appeal ruled that the granting of exploitation rights by the municipality must be taken into account as one activity to be assessed and that this activity cannot be clustered with the 'management of public space'. In this context, the Court of Appeal considers it important that the nature of the activity differs substantially from the activities that, according to the municipality, fall under 'the management of public space'. In addition, according to the Court of Appeal, it is also relevant that the municipality does not act as a unit in social traffic by granting exploitation rights and the management of public space, since the customers of both activities are different.

As far as the alternative position is concerned, the Court of Appeal ruled that the granting of exploitation rights cannot be regarded as the letting of parts of the public space. According to the Court of Appeal, it is therefore not necessary to assess whether or not there is more than normal asset management. The reason for this is that the granting of a right of exploitation by the municipality does not arise from an asset that the municipality holds. In the absence of this, according to the Court of Appeal, there can be no question of asset management, so that the question of whether there is more than normal asset management does not arise.

The Court of Appeal is also of the opinion that the actual activities of the interested party with regard to the granting of exploitation rights provide the labour required for the company. The Court of Appeal is thus of the opinion that the activities of the interested party constitute a material undertaking.

With regard to the more alternative position, the Court of Appeal is of the opinion that the granting of exploitation rights does not constitute a government task within the meaning of the government tasks exemption. In that regard, it is important to note that it is common ground that the possibility for advertising operators to exploit outdoor advertising is not a task imposed by law on the municipality in its capacity as a public authority. Incidentally, according to the Court of Appeal, it is plausible that the municipality is in competition with private parties that offer advertising space within the public space (e.g. advertisements at train stations, in and/or on city buses), which means that the government tasks exemption does not apply for that reason either.

Finally, the Court of Appeal ruled that the municipality cannot capitalise current contracts with advertising operators on its opening balance sheet for the net profit to be made from those contracts. The expected revenue from the current contracts is directly related to the services to be provided by the municipality to the advertising operators. In the opinion of the Court of Appeal, the future profit capacity embodied in the contracts - assuming that it is present on 1 January 2016 - should be reflected in the years in which this profit is realised.

What do we notice?

We find it difficult to agree with the Court of Appeal's view that the granting of exploitation rights cannot be regarded as the letting of parts of the public space. In a 'classic' situation in which a commercial property is rented, in our opinion an exclusive right to operate business activities within the leased premises is also granted for a fee. In our view, the fact that this is a question of granting a right to exploit does not alter this.

Furthermore, we find it remarkable that, in the opinion of the Court of Appeal, the granting of a right of exploitation by the municipality does not arise from an asset that the municipality has and therefore the question of whether there is normal asset management is not addressed. We wonder why the municipal land on which the advertising object is placed and the municipal object to which the advertising object is attached do not qualify as assets. In our view, this situation is not fundamentally different from the letting of an asset.

We are also surprised by the opinion that the municipality is competing with private parties with its activities. In view of the nature of the municipality's activities, our opinion is that it is precisely the contracting parties of the municipality who exploit the advertising and thus possibly compete with other providers on the private market.

Importance for practice

After a number of court rulings, this judgement of the Court of Appeal of 's-Hertogenbosch is the first time that a Court of Appeal has ruled on the possible corporation tax obligation of municipalities to grant exploitation rights for the purpose of advertising. Looking at the judgement of the Court of Appeal, we are of the opinion that the judgement expressed is difficult to explain and also seems to be based on an incorrect interpretation of the concept of "material undertaking" and the qualification of the work required for it. It is not yet known to us whether the municipalities in question will appeal to the Supreme Court.

For the time being, we still advise municipalities with revenues from the granting of operating rights to include these revenues in the CIT return and then to lodge an objection against the assessments imposed. Subsequently, municipalities (in consultation with the inspector) can join a possible ruling of the Supreme Court, as soon as this case has been exhausted.