Economic activity

What it means

Economic activity, for VAT purposes, is any regular activity of a producer, trader or service provider carried out to earn income, including the exploitation of property to obtain income. The concept comes from the EU VAT Directive and underpins the whole system.

Anyone carrying out economic activity independently is a taxable person regardless of legal form, whether a company, a sole trader, a non-profit or an individual without a trade licence. What matters is whether the activity aims at income and is carried on regularly.

A taxable person is not necessarily a VAT payer. It becomes one on registration, for example after exceeding the turnover threshold or voluntarily. Taxable person status matters even without registration, for instance for the place of supply of services or purchases from abroad.

How it works in practice

A typical example of exploiting property is long-term letting of real estate. An individual who lets flats carries out economic activity and must register for VAT once the turnover threshold is exceeded, even though residential lettings are usually exempt.

With holding companies, the question is whether the parent merely holds shares and receives dividends, which is not economic activity, or also provides services to subsidiaries for a fee. This decides whether it can deduct VAT on advisory or acquisition costs.

Non-profits and foundations may carry out economic activity alongside their public benefit mission, such as selling publications or letting premises. For that part they are taxable persons and must register for VAT once they reach the turnover threshold.

What to watch out for

A one-off sale of private property, such as a car or a flat, is usually not economic activity. If sales are repeated, however, for example regular buying and selling of property, the tax authority may treat the activity as economic, with all the obligations that follow.

Economic activity for VAT does not fully coincide with business under the Trade Licensing Act or with taxable income for income tax. An activity can be economic for VAT even if no trade licence is needed, so each law has to be assessed separately.