The Court Decision in Case C-43/19 Vodafone Portugal –Comunicações Pessoais SA
In this issue:
Case C‑43/19 Vodafone Portugal –Comunicações Pessoais SA
- Supply of services for consideration
The case concerns the amounts received by services suppliers from their clients following the early termination of the related agreements, prior to the end of the contractual tie-in period.
Facts of the case and Court Decision
Vodafone (or ‘the Company’) is a supplier of electronic communications services, fixed telephony and wireless internet access. Vodafone concludes services contracts with its customers that contain certain preferential contractual clauses in exchange for the acceptance by the latter of a minimum contracting period. Based on these clauses, Vodafone ensures that it can recover part of its investment in telecommunications equipment and infrastructure, the activation of certain services as well as the special advantages granted to customers, by invoicing additional amounts in case the contracts are terminated prior to the end of the minimum period, due to the clients’ default.
The respective amounts cannot exceed the costs incurred by the Company for the purpose of installing the services, proportional to the advantage granted to the client, identified and quantified as such in the contract. Thus, these amounts are not equal to the amounts which Vodafone would have received during the remaining contracting period, in the event the contract would not have been terminated.
Vodafone was of the view that these additional amounts are not subject to VAT, view which was not shared by the Portuguese tax authorities.
Following a tax litigation, the Portuguese authorities raised questions to the Court of Justice of the European Union (‘CJEU’) regarding the VAT treatment applicable to the amounts under discussion.
In the Court’s view, the amounts form part of the costs of the services which the supplier committed to provide, their purpose being similar to the one of the monthly services subscriptions, that the clients committed to pay based on the contract.
Therefore, from the perspective of the economic reality, the purpose of the amounts charged due to the early termination of the contracts is to ensure a minimum contractual remuneration at the level of the supplier.
The Court was of the view that the supply of services was performed given that the client had the possibility to benefit from the services rendered by the Company. The value of the amounts paid by the customer to Vodafone consists of the customer's right to benefit from the execution by the Company of the obligations arising from the services contract, even if the customer does not want or cannot exercise this right for a reason attributable to him.
Additionally, the CJEU mentions that the remuneration for the services rendered by Vodafone is determined in accordance with well-established criteria, based on the contract concluded between the parties. It does not represent an amount paid on a voluntary basis and uncertain and it is not difficult to quantify such an amount.
Thus, the amounts paid by the clients represent the remuneration actually received by the Company and representing the value of identifiable services.
Contrary to the arguments brought by the Company according to which the amounts at issue are related to operations outside of VAT scope, the CJEU notes that the amounts are not comparable to statutory payments and are not meant to cover losses suffered by the supplier further to the termination of the contract due to the client’s fault.
The CJEU concluded that the amounts paid by the clients to Vodafone following the early termination of the contracts are related to supplies of services within the VAT scope, being thus subject to VAT.
The decision reinforces the conclusion of the Court in case C-295/17 MEO and other subsequent cases, based on which the amounts charged to clients by the suppliers further to the early termination of contracts, where such contracts provided for a minimum contracting period, are subject to VAT.
Moreover, based on the decision, the value of these amounts, namely whether or not they are equal to the value of the services that would normally have been rendered, is not a determinant factor in establishing the applicable VAT treatment. Thus, it is necessary that the economic reality of the transactions is analysed.
Further to the Court’s decision, we recommend companies, particularly in the field of telecommunication services, to re-analyse and, if the case, to correct the VAT treatment applied to the amounts invoiced to clients further to the early termination of contracts.
EY team can help in determining the correct VAT treatment applicable to transactions, as well as recommendations regarding the actions to be taken in case corrections are required in respect of VAT related obligations at the level of the companies.