CJEU and VAT on contract termination – an important judgment for entrepreneurs

At the end of 2024, the Court of Justice of the European Union issued an important decision regarding VAT. Although the case concerned an Austrian company, its consequences may also be significant for entrepreneurs operating in other European Union countries – including Poland. It is worth paying attention to this judgment, especially in the context of similar economic events.

Background to the case

The dispute concerned a situation in which the company entered into a contract for the implementation of a construction project, but after three months decided to withdraw from the contract and requested that the work be suspended. The contractor, despite not completing the order, filed a claim for payment of remuneration – reduced by the costs that were saved due to the early termination of cooperation. The question arose whether this amount should be subject to VAT.

The national courts had different opinions: the court of first instance found that the service was subject to VAT, while the court of appeal held otherwise. Ultimately, the case went to the CJEU, which was to assess whether such payment constituted remuneration for a service within the meaning of the EU VAT Directive.

The key question is: is this a benefit or compensation?

The crux of the matter was the relationship between the payment and the service provided. If the payment were to be considered compensation, it would not be subject to VAT. However, if it were to be considered remuneration for a service, tax would have to be charged.

The position of the ECJ

The Court ruled that in a situation where a contract for the provision of services was validly concluded and the contractor had commenced its performance and was ready to complete it, even in the event of its early termination by the principal, the payment due to the contractor constitutes a paid provision of services. Therefore, it should be subject to VAT.

According to the Court, the key issue is that the service provider was ready to provide the services in accordance with the contract, and its actions enabled the principal to use those services. The fact that the principal did not want to or could not use them does not release him from the obligation to pay remuneration.

In the opinion of the CJEU, the amount paid is not a form of compensation for the damage suffered, but is a remuneration for a service that has been started and is ready to be completed. Importantly, this amount corresponds to the agreed remuneration from the contract, reduced by the costs not used due to the early termination of the contract.

What does this mean for entrepreneurs?

Although the case was decided under Austrian law, the judgment issued is applicable in all European Union countries. For Polish entrepreneurs, this means that in situations related to early termination of the contract and calculation of remuneration - it is worth carefully analyzing whether a given payment is subject to VAT.

In business practice, doubts often arise as to whether certain amounts should be treated as remuneration or compensation – and the interpretations of tax authorities are not always consistent. The CJEU ruling may therefore constitute a valuable interpretative guide and help in making the right decisions.