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Briefing document & Podcast: ECJ VAT C-622/23 (RHTB) – VAT Implications in Work Contract Cancellations

4 weeks ago
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Briefing Document: VAT on Contract Termination – Case C-622/23

This briefing document summarizes the key themes, ideas, and facts from the provided sources regarding Case C-622/23, a preliminary ruling concerning the application of Value Added Tax (VAT) to payments made when a service contract is terminated early by the client. The case revolves around a dispute in Austria between rhtb: projekt gmbh (contractor) and Parkring 14-16 Immobilienverwaltung GmbH (client) where Parkring terminated a building project contract after work had commenced. The central question is whether the payment owed to rhtb, based on Austrian law, is subject to VAT under EU law.

1. Core Issue: VAT on Payments After Contract Termination

The fundamental legal question at the heart of Case C-622/23 is whether the payment owed to a contractor when a client terminates a service contract prematurely, despite the contractor being ready and willing to complete the work, constitutes “remuneration” for a “supply of services for consideration” under Article 2(1)(c) of the EU VAT Directive. This determination dictates whether VAT applies to the payment. As the “VAT on Contract Termination: Case C-622/23 Analysis” source states: “The core issue is whether Value Added Tax (VAT) applies to the full contractually agreed amount when a client terminates a service contract after work has begun, but before completion, where the service provider was ready and willing to complete the work.”

2. Article 2(1)(c) of the VAT Directive: Defining Taxable Transactions

This article is the cornerstone of the case. It states that “the supply of services for consideration within the territory of a Member State by a taxable person acting as such” is subject to VAT. The key here is the phrase “for consideration.” The Court needed to determine if the payment to rhtb qualifies as “consideration” even though the service was not fully rendered.

3. Paragraph 1168(1) of the ABGB (Austrian General Civil Code): National Law’s Role

This Austrian law is central to the facts of the case. It dictates that “In the event of non-performance of the work, the contractor shall nevertheless be entitled to the agreed remuneration if it was prepared to supply the service and, through circumstances attributable to the customer, was prevented from doing so.” The ABGB allows rhtb to claim the agreed-upon amount (less savings), prompting the question of VAT applicability. Therefore, the Oberster Gerichtshof (Supreme Court, Austria) referred the question of whether EU VAT law applies to this payment under Austrian law for a preliminary ruling.

4. The “Direct Link” Test: Reciprocal Performance

The “direct link” test, established in previous CJEU case law, is crucial in determining whether a service is “for consideration.” It requires a legal relationship between the provider and recipient with reciprocal performance. The payment received must be “the actual consideration for an identifiable service supplied to the recipient” (as described in the “VAT on Contract Termination: Case C-622/23 Analysis” source). If there’s a direct and clear connection between the service (agreed upon or provided) and the payment, VAT applies. The Court consistently emphasizes this reciprocal element.

5. Distinguishing from Société thermale d’Eugénie-les-Bains (C-277/05): Identifiable Supply of Services

The Court specifically distinguished this case from Société thermale d’Eugénie-les-Bains. In the earlier case, a deposit for a cancelled reservation was deemed fixed compensation without an identifiable supply of services. In contrast, Case C-622/23 involved a contract where work had already begun, and the contractor was prepared to complete the entire project. As the judgement notes, “there is indeed an identifiable supply of services and the supplier had, moreover, begun the agreed works and was prepared to carry them out in their entirety in order to bring the contract to a successful conclusion.” This difference was critical.

6. Similarities to Vodafone Portugal (C-43/19): Early Termination and Remuneration

The Court found similarities to Vodafone Portugal, where a customer terminated a service contract early. In that case, the payment Vodafone received for the remaining contract period was deemed remuneration for the service, even if deactivated. Similarly, in Case C-622/23, the Court determined that “the payment received or receivable constituted remuneration for the service, even though the service was not fully performed due to the customer’s actions.” The key factor was the service provider had either placed the customer in a position to benefit or had already begun providing the service. As paragraph 21 of the judgement states “In a situation such as that at issue in the main proceedings, the supplier of services not only placed the customer in a position to benefit from the supply of services, within the meaning of the case-law cited in paragraph 17 above, but, since it had already begun the agreed works, actually provided part of that supply, it being noted that the supplier was prepared to perform that contract to completion.”

7. Economic and Commercial Realities: Minimum Contractual Remuneration

The Court considered the “economic and commercial realities” of the situation. It recognized that the payment under the ABGB reflected the contractually agreed remuneration (less savings), establishing a direct link. Furthermore, it provided the supplier “with a minimum contractual remuneration.” This highlights the Court’s focus on the overall economic substance of the transaction.

8. The Ruling: VAT Applies

The Court ruled that Article 2(1)(c) of the VAT Directive should be interpreted to mean that the contractually due amount, after the recipient terminates a service contract where the supplier had started providing services and was prepared to complete them, constitutes remuneration for a supply of services for consideration and is therefore subject to VAT. As stated in the judgement “Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the amount contractually due following the termination, by the recipient of a supply of services, of a contract validly concluded for that supply of services, subject to value added tax, which the supplier had begun providing and which it was prepared to complete, must be regarded as constituting the remuneration for a supply of services for consideration, within the meaning of Directive 2006/112.”

Implications: This ruling has significant implications for businesses involved in service contracts. It clarifies that payments made due to premature contract termination can be subject to VAT, which is helpful for both contract negotiations and accounting practices.

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