The subsidy mechanism of the CHP act and its effect on VAT

The German CHP Act came into force on 1 April 2002. The Act contains a complex subsidy mechanism which entails various (supplementary and compensatory) payments. The question arises of how such transactions should be treated for the purposes of VAT. Payment for CHP electricity consists of a variable component and a set supplement. The variable component is the (market) price to be agreed between the plant and grid operators. The amount of the supplement and the duration of its payment are specified in the CHP Act. If the CHP plant operator is a business within the meaning of §2 of the German VAT Act, both the price and the supplement for the CHP electricity which the operator has provided to the grid for unspecified use constitute payment and thus the basis of assessment for the VAT to be paid by the operator. However, it should be noted that «small businesses» are exempt.