End of the emanation theory for intermunicipal associations

What did the emanation theory entail?

Anyone in Flanders who is involved in an intermunicipal association, an association entrusted with specific tasks, or another form of intermunicipal cooperation will probably be familiar with the emanation theory.

Under this administrative tolerance, an intermunicipal association was deemed to act “in place of” the participating municipalities where those municipalities had effectively transferred their management and regulatory powers for a specific task to the intermunicipal association.

The result? The intermunicipal association was only subject to VAT to the extent that the municipality itself would have been subject to VAT. The municipalities’ contributions towards management costs were therefore also outside the scope of VAT.

For many years, this arrangement provided legal certainty and a favourable tax framework for the provision of municipal services through intermunicipal cooperation. That certainty is now under pressure.

Judgment T-575/24: no scope for non-taxable status outside the VAT Directive

The change in approach was prompted by a request for a preliminary ruling from the Antwerp Court of Appeal. The Court questioned whether the emanation theory was compatible with the European VAT Directive and the principle of neutrality.

On 25 February 2026, in the case of the Belgian State/Federal Public Service Finance v Digipolis Antwerpen AG and District09 AG, the General Court of the European Union ruled that a public-law association entrusted with specific tasks that supplies services to its members for consideration is in principle subject to VAT. The VAT status of its members does not alter this conclusion.

Referring to the Advocate General’s Opinion in this case, the General Court held that the emanation theory creates a situation of non-taxation for which the VAT Directive, and Articles 11 and 13 in particular, does not provide.

A national administrative arrangement therefore cannot prevent an entity that independently carries out an economic activity for consideration from being regarded as a taxable person for VAT purposes. In such a case, its services must in principle be subject to VAT.

Change of approach by the tax authorities

In Circular 2026/C/81, the Belgian tax authorities draw the consequences of this judgment. According to the tax authorities, the emanation theory, as set out in previous administrative circulars and decisions, can no longer be defended and is therefore abolished.

This has significant practical consequences.

From now on, each intermunicipal association and each intermunicipal cooperation arrangement (including interlocal associations, project associations, service-providing associations and associations entrusted with specific tasks) must be assessed separately to determine whether it can be regarded as a body governed by public law within the meaning of Article 6, first paragraph, of the Belgian VAT Code.

Whether regulatory or management powers have actually been transferred is no longer relevant for this assessment.

When is an intermunicipal association outside the scope of VAT?

If an intermunicipal association qualifies as a body governed by public law, it is in principle outside the scope of VAT.

There are, however, important exceptions. The exclusion does not apply to activities that would lead to significant distortions of competition.

Activities listed in Article 6, third paragraph, of the Belgian VAT Code are also not outside the scope of VAT where they are carried out on more than a negligible scale. Examples include the supply of water, gas or electricity and the operation of parking facilities.

The organisation’s specific activities will therefore become decisive in determining its VAT treatment.

What if an intermunicipal association is subject to VAT?

If the intermunicipal association or cooperation arrangement is regarded as a taxable person for VAT purposes, transactions carried out for third parties or for the participating municipalities must in principle be treated in accordance with the ordinary VAT rules.

This may have consequences for, among other things, invoicing to municipalities, the right to deduct VAT and the VAT treatment of investments.

What about operating grants and subsidies?

The Circular introduces an important distinction regarding the funding flows of intermunicipal associations.

General operating grants paid by municipalities to cover the intermunicipal association’s operating costs remain, in principle, outside the scope of VAT.

The situation is different for subsidies directly linked to the price of a supply of goods or services. Such subsidies continue to form part of the taxable amount and may therefore be subject to VAT.

It is therefore important to examine not only the organisation’s activities but also its funding structure.

New VAT rules apply from 1 January 2027 at the latest

The new rules must be applied no later than 1 January 2027.

For the period before that date, the tax authorities provide for a transitional arrangement. Organisations that correctly applied the former emanation theory in accordance with the conditions applicable at the time should, in principle, not face any objections from the tax authorities in respect of that application.

For intermunicipal associations, associations entrusted with specific tasks and other forms of cooperation between local authorities, now is the time to reassess their VAT position and prepare for the new situation.