The background of the case
The object of Vodafone, a company established in Lisbon (Portugal), is the supply of electronic communications services, fixed telephony, and wireless internet access.
In the context of its business activities, Vodafone concludes with its customers services contracts, some of which include special promotions subject to conditions that tie those customers in for a predetermined minimum period (‘the tie-in period’). The customers commit to maintaining a contractual relationship with Vodafone and to using the goods and services supplied by that company for the tie-in period, in exchange for benefiting from advantageous commercial conditions, usually related to the price payable for the contracted services.
The tie-in period may vary according to those services. Failure by customers to comply with the tie-in period for reasons attributable to themselves results in them paying the amounts provided for in the contracts. Those amounts seek to deter such customers from failing to comply with the tie-in period.
Vodafone calculated the amount payable by customers in the event of their non-compliance with the tie-in period, on the basis of the calculation of the benefits granted to those customers under the contracts concluded with them and for which, on the date of termination of those contracts, Vodafone had still not been compensated. Under national law, the amount to be paid in cases of non-compliance with the tie-in period is to be calculated, in proportion to the completed part of the tie-in period, on the basis of the benefits granted to the customer under the contract, which are identified and quantified therein. That amount may not exceed the costs incurred by Vodafone for the purposes of installing the service.
The substance of the dispute and the preliminary question were the necessity of the determining whether the amounts at issue in the main proceedings constitute the remuneration for a supply of services for consideration subject to VAT
By its questions, which must be examined together, the referring court asks, in essence, whether the article of the VAT Directive must be interpreted as meaning that amounts received by an economic operator in the event of early termination, for reasons specific to the customer, of a services contract requiring compliance with a tie-in period in exchange for granting that customer advantageous commercial conditions, must be considered to constitute the remuneration for a supply of services for consideration, within the meaning of that provision.
CJEU ruling
The Court has held that in the present case, it must be pointed out that, according to the information provided by the referring court, the amounts at issue in the main proceedings are calculated according to a contractually defined formula, in compliance with the conditions laid down under national law. It is apparent from that information that those amounts cannot exceed the costs incurred by the service provider in the context of the operation of those services and must be proportionate to the benefit granted to the customer, that benefit having been identified and quantified as such in the contract concluded with that provider. Accordingly, those amounts do not automatically reflect either the total value of the installments outstanding on the date of termination of the contract or the amounts which the service provider would have received during the remainder of the tie-in period in the absence of such termination.
Vodafone commits to providing to its customers the supplies of services agreed in the contracts concluded with them and under the conditions stipulated in those contracts. On the other hand, its customers commit to paying the monthly installments provided for under those contracts and also, if necessary, the amounts due where those contracts were terminated before the end of the tie-in period for reasons specific to those customers.
In that context, as the referring court makes clear, those amounts reflect the recovery of some of the costs associated with the supply of the services which that operator has provided to those customers and which the latter committed to reimbursing in the event of such a termination.
Consequently, those amounts must be considered to represent part of the cost of the service which the provider committed to supplying to its customers, that part having being reabsorbed within the monthly installments, where the tie-in period is not complied with by those customers. In those circumstances, the purpose of those amounts is analogous to that of the monthly installments which would, in principle, have been payable if the customers had not benefited from the commercial benefits conditional upon compliance with the tie-in period.
In those circumstances, the amounts at issue in the main proceedings must be considered to form part of the remuneration received by the operator for those services.
Not in dispute that the payment of the amount in question is made in the context of a legal relationship characterised by reciprocal performance between the services provider and its customer and that, in that framework, that payment constitutes a contractual obligation for the customer.
The amount payable in the event of early termination must be considered an integral part of the price which the customer committed to paying for the provider to fulfill its contractual obligations
On those grounds, the Court hereby rules that amounts received by an economic operator in the event of early termination, for reasons specific to the customer, of a services contract requiring compliance with a tie-in period in exchange for granting that customer advantageous commercial conditions, must be considered to constitute the remuneration for a supply of services for consideration, within the meaning of that provision.
ASB Tax – how can we help?
If you think that the above may have an impact on the correct VAT settlement of the Company, we can support you in:
- analysis of agreements, in order to determine whether the amounts received by an economic operator in the event of early termination, for reasons specific to the customer the constitute the remuneration for a supply of services for consideration subject to VAT OR confirm the compensatory nature of the additional remuneration;
- apply for an individual tax ruling for the tax security purposes against negative tax consequences of applied tax treatment, as well as reviewing the obtained tax rulings in respect of their actual protection value for the taxpayer;
- if it will be necessary, preparation of a so-called “defense file” to justify the correctness of the business approach.
Anna Szafraniec
CEE VAT Compliance Director
E: aszafraniec@asbgroup.eu
Łukasz Woźniak
VAT Compliance Manager
E: lwozniak@asbgroup.eu
