Amounts cashed for early termination of telecom contracts - within the scope of VAT?

27/06/18

In brief

The Court of Justice of the EU (“Court”) recently issued the opinion of the Advocate General in case C–295/17 MEO – Serviços de Comunicações e Multimédia SA, according to which amounts cashed for early termination of telecom contracts fall within the scope of VAT. The ruling of the Court can either follow the same reasoning or take a different approach.

In detail

Portuguese company MEO provides telecommunication services for a discounted price to customers that sign contracts for a mandatory minimum period. In the event of non-payment for the services rendered, the company terminates such contracts in advance and charges customers for the value of the services to be rendered until the expiry of the mandatory minimum contractual period. Treating such charges as compensation, operations falling outside the scope of VAT, the company did not collect VAT in this respect. The Portuguese tax authorities, however, considered that the company did not suffer any loss as a result of the early termination of the contracts and, thus, imposed additional tax liabilities consisting in output VAT collected for those amounts.

The Advocate General concluded that such amounts qualify as remuneration for the services already rendered, subject to VAT, on the grounds that:

  • the amounts represent exactly the value of the services rendered until the date of expiry of the mandatory minimum contractual period;
  • the company did not suffer any loss as a result of the early termination of the contracts.

The Advocate General argued that such contracts cover a fixed remuneration, corresponding to the initial contractual period, regardless of whether the contracts are terminated in advance or not and, thus, regardless of the number of months for which the customers actually benefit from the services. As such, the Advocate General deems such contracts to be hire purchase agreements, where, for the value of the services to be rendered until the date of expiry of the mandatory minimum contractual period, VAT is due at the date of termination of the contract.

Source: Opinion of Advocate General Juliane Kokottt in Case C-295/17 MEO- Serviços de Comunicações e Multimedia SA published on the website Curia.europa.eu on 7 June 2018]

The takeaway

This conclusion confirms that, for contractual penalties for the early termination of agreements, falling outside the scope of VAT, there must be a causal link between the charging of such amounts and a potential suffered loss. Furthermore, the value of the penalties has to be different from the price of the services to be rendered until the date of expiry of the mandatory minimum contractual period.

To the extent that the Court follows the Advocate General's conclusions, it is important to note that such a decision could be extended to all cases where customers are charged for the early termination of contracts.

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