CJEU: VAT application upon contract termination
The Court of Justice of the European Union (CJEU) has addressed the issue of applying VAT upon the withdrawal from a contract for services. The court concluded that any amount to be paid after withdrawal from a contract for the supply of services is subject to VAT.
The CJEU considered Case C-622/23 rhtb: projekt gmbh v Parkring 14-16 Immobilienverwaltung GmbH where the provider had started construction work based on a contract for services, but the recipient subsequently withdrew from this contract. In accordance with the contractual arrangement, the provider demanded payment of the agreed consideration after deduction of the costs saved due to the termination of the contract, including the relevant VAT. The supply recipient did not agree with the application of VAT, arguing that the service provider was no longer obliged to provide the remainder of the supply and that the condition of the direct link between the consideration received and the service supplied had therefore not been met.
The CJEU recalled that, for VAT purposes, a supply of services for consideration is a supply of services where there is a direct link between the supplied service and the received consideration. This means that there must be a legal relationship between the provider and the recipient, and that the consideration received constitutes actual consideration for an identifiable service.
According to relevant case law, e.g. the judgment in Case C-43/19 Vodafone Portugal, a contractually pre-agreed amount received upon the early termination of a contract and corresponding to the amount that would have been received during the contracted period must be regarded as remuneration for the services. Thus, it is subject to VAT, notwithstanding that the termination of the contract implies the termination of the obligation to provide the agreed services.
Based on these principles, the CJEU ruled in the present case that the payment of the agreed price was subject to VAT since the provider had begun to perform under the contract and was prepared to do so throughout its term. The consideration for the amount to be paid by the supply recipient is the recipient’s right to benefit from the fulfilment of the contractual obligations even if the recipient has chosen not to exercise that right. According to the court, account must also be taken of the economic and commercial realities of the transaction, where, based on an economic approach, the due amount not only reflects the contractually agreed remuneration after the deduction of the saved amounts, but also provides the supplier of the services with a minimum contractual remuneration.
Contrariwise, factual differences can be found, e.g., in judgment C-277/05 Société thermale d'Eugénie-les-Bains, where the CJEU held that non-refundable deposits for room bookings constitute only compensation for damage that is not subject to VAT. There was no direct link between the service supplied and the consideration received, as the room reservation did not constitute an individual service. The non-refundable deposit was therefore considered to be fixed compensation for the cancellation of the contract.
In the present case, C 622/23, the payment of the contract price cannot be regarded as fixed compensation for damage.