Compensation for unrealised service paid upon early contract termination subject to VAT?

The Court of Justice of the EU (CJEU) held that the amount paid by customers upon early terminations of contracts should be considered part of the price for services and thus subject to VAT. The CJEU based its judgment primarily on the recent Serviços de Comunicações e Multimédia SA (C-295/17 MEO) case.

Vodafone Portugal provided its customers with telecommunication services at preferential prices upon the conclusion of a contract for a predetermined minimum (‘tie-in’) period. Were those contracts terminated before the end of the tie-in period, customers had to pay an amount stipulated in the contract. In compliance with Portuguese law, this amount was not to exceed the costs incurred by Vodafone for installing the service. Unlike in case C-295/17, the amounts did not equal all payments the customer would have paid over the term of the contract but were lower. Vodafone first declared these amounts as subject to VAT, however, later on, requested a correction as it newly considered these amounts not subject to VAT.

The CJEU held that the consideration for the price paid by the customer is the customer’s right to benefit from the fulfilment of the obligations arising to Vodafone from the contract, irrespective of the fact that the customer no longer wishes to or cannot use it. Vodafone enables the customers to use these services and the termination of using these services cannot be made at the expense of the operator. The above amounts retrospectively included in the monthly instalment amounts must be considered as part of the cost of the services Vodafone committed itself to provide to customers. The CJEU further held that, from an economic viewpoint, a predetermined amount received when a contract for the supply of services is terminated early guarantees a minimum consideration for the provided supplies. The amounts paid by customers upon early termination of contracts thus must be subject to VAT. Just as in case C-295/17, the CJEU also found irrelevant that the amount paid by Vodafone’s customers did not correspond to the value Vodafone would have obtained if the contract had not been terminated early.

The CJEU ruled that both the consideration for the right to use the services and the services themselves had been determined the moment relevant contracts were entered into. The consideration had thus been determined using clearly specified criteria, according to which both monthly instalments and the manner of calculating the amount for the early termination of the contract were determined, hence any consideration paid by customers was not voluntary or incidental.

Although the amounts paid by customers upon early terminations of contracts did not correspond to the amounts Vodafone would have obtained if contracts had not been terminated early, the CJEU ruled in the same way as in case C-295/17 MEO. These amounts must be considered part of the price and are thus subject to VAT.


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