Early termination of contracts, VAT and damages

The CJEU has reconfirmed that a payment of by a customer on early termination of a contract will amount to consideration for a supply for VAT purposes: rhtb: project gmbh v Parkring 14-16 Immobilienverwaltung GmbH (CJEU, 28 November 2024). However, the interesting feature in this case is that the relevant payment appears not to have been part of the contractual arrangements between the parties but a payment required by the Austrian General Civil Code in cases of, essentially, breach of contract by the customer. As such, it raises the question whether the approach that is now accepted as applying to treat contractually agreed payments on termination of contract as consideration for the supplies made by the supplier under the contract should also apply to damages for breach of contract where there is no such liquidated damages clause.

Background

The case concerns a dispute between two Austrian companies concerning contractual arrangements for the carrying out of a construction project. After works had commenced, the customer, Parkring, informed the supplier, rhtb, that it no longer required the services and terminated the contract.

In those circumstances, rhtb requested payment of an amount required under Austrian General Civil law which provided that, in a case of non-performance, a contractor is entitled to the agreed remuneration if prepared to supply the services, less amounts saved as a result of non-performance (Paragraph 1168).

When Parkring failed to make payment, rhtb applied to the courts to enforce payment of the amount required by Paragraph 1168 (some €1.5m) plus VAT. The Austrian courts decided to refer to the CJEU the question whether VAT was due in the circumstances on the payment required by Paragraph 1168.

Decision of the CJEU

The CJEU has held that a payment made by the recipient of a supply and a supplier in these circumstances is subject to VAT. The Court referred to its judgment in Vodafone Portugal (Case C43/19) concerning contractual compensation payments in which the Court held that the consideration received by the supplier for its agreement to supply services included any predetermined amount payable where the customer terminates the contract early and where the sum paid corresponds to the amount the supplier would have received for the remainder of the contract. That is the case even though the termination entailed "deactivation of the services".

According to the CJEU, that analysis equally applied in the current case, where the supplier had begun providing the services and was prepared to complete its supplies for the amounts contractually provided for. The amounts paid by the customer under Article 1168 were essentially consideration for the customer's right to benefit from the fulfilment of the contractual services, even if it no longer wished to receive them. In addition, the economic and commercial reality of the situation was that the amount provided for under Paragraph 1168 reflected the contractually agreed amount (such that there was the necessary direct link) but also provided the supplier with a minimum contractual remuneration.

The Court went on to seek to distinguish the Vodafone approach to the approach taken in earlier cases such as Societe Thermale d'Eugenie-les-Bains (Case C-277/05). In the latter case it was held that a forfeited deposit paid in respect of the reservation of a hotel room was not consideration for a supply. The Court notes that in that case it was held that the reservation of a room was not a separate and identifiable supply of services, such that the deposit could not be consideration for any such taxable service. By contrast, in this case there was an identifiable supply which had indeed commenced.

Comment

The decision of the Court appears to take the principle adopted in Vodafone concerning liquidated damages payments provided for in commercial contracts and apply it to payments required in similar circumstances under general law. It raises the question, therefore, whether a payment of damages in such circumstances would equally be subject to VAT.

Unfortunately, the Court's judgment does not explicitly recognise the difference between contractual provisions specifically agreed by the parties (as in Vodafone) and payments, such as damages, required under general law. Indeed, despite the fact that the payment in this case appears to have been based on the General Civil Code, the dispositive paragraph in the case states that the VAT rules must be interpreted as meaning that "the amount contractually due following the termination" must be treated as consideration for a supply.