ECJ C-295/17 (MEO – Serviços de Comunicações e Multimédia) – Judgment – VAT due on early termination of broadband deal

The European Court of Justice gave its Judgment in case C-2915/17 (MEO – Serviços de Comunicações e Multimédia) on 22 November 2018. The case deals with the VAT treatment of early termination of subscriptions and ‘damage payments’.

Article in the EU VAT Directive

Articles 2(1)(c), 64(1), 66(a) and 73 of Directive 2006/112/EC

Article 2
1. The following transactions shall be subject to VAT:
(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

Article 64 (Chargeable Event and chargeability of VAT)
1. Where it gives rise to successive statements of account or successive payments, the supply of goods, other than that consisting in the hire of goods for a certain period or the sale of goods on deferred terms, as referred to in point (b) of Article 14(2), or the supply of services shall be regarded as being completed on expiry of the periods to which such statements of account or payments relate.

Article 66 (Chargeable Event and chargeability of VAT)
By way of derogation from Articles 63, 64 and 65, Member States may provide that VAT is to become chargeable, in respect of certain transactions or certain categories of taxable person at one of the following times:
(a) no later than the time the invoice is issued;

Article 73 (Taxable amount)
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Facts

MEO, a company established in Portugal, has as its main activity the provision, on Portuguese territory, of telecommunications services.

As part of its activity, MEO concludes contracts with its customers for the supply of services in the fields of telecommunications, internet access, television and multimedia, some of which provide for minimum commitment periods, while offering its customers favourable terms, particularly in the form of lower monthly subscription fees.

These contracts also stipulate that, in the case of deactivation of the goods and services referred to therein before the expiry of the agreed minimum commitment period at the request of customers or for a reason which is attributable to them, MEO is entitled to compensation corresponding to the amount of the agreed monthly subscription fee multiplied by the difference between the duration of the minimum commitment period provided for in the contract and the number of months during which the service was provided.

According to the referring court, the amount payable by the customer to MEO in case of early termination of the services contract is therefore made up of the amount of the subscription fee that corresponds to the full amount of the minimum commitment period, even if the service is not supplied to the customer up to the end of that period.

It is also apparent from the order for reference that the customer is liable to pay that amount where services are deactivated before the end of the minimum commitment period, in particular if the customer fails to pay the agreed monthly subscription fee.

The Portuguese tax authorities assessed MEO for VAT that they argued should have been paid on the amount which had been invoiced to customers as a result of the early termination of services contracts.

According to MEO, there was no actual supply, as it did (no longer) supply services to its customers. The amount received from the customer should be treated as ‘not subject to VAT’.

Questions

1. Must Articles 2(1)(c), 64(1), 66(a) and 73 of Directive 2006/112/EC be interpreted as meaning that a telecommunications operator (television, internet, mobile network and fixed network) is liable for value added tax as a result of charging its customers –– in a case of termination, for reasons attributable to the customer, of a contract containing an obligation to be bound by the contract for a defined term (tie-in period) before the end of that period –– a pre-determined amount, corresponding to the basic monthly amount payable by the customer under the contract, multiplied by the number of monthly payments that are still to be made before the end of the tie-in period, the operator having, at the time when that amount is invoiced and independently of its actual payment, already ceased to provide the services, where:

(a) the contractual purpose of the amount invoiced is to deter the customer from disregarding the tie-in period which he has undertaken to observe and to make good the damage sustained by the operator as a result of the failure to complete the tie-in period –– in particular, on account of loss of the profit the operator would have obtained if the contract had continued until the end of the period, as well as on account of the agreement to charge lower tariffs, the supply of equipment or other offers, free of charge or at discounted prices, and the costs of advertising and of acquiring customers;

(b) contracts negotiated with a tie-in period entail higher remuneration for the commercial intermediaries who obtained them than contracts obtained by them without a tie-in period and that remuneration is calculated, in each case (that is, as regards contracts with or without a tie-in), on the basis of the amount set for monthly payments in the contracts obtained;

2. Is the answer to the first question liable to change in the event that one or more of the situations described in points (a), (b) and (c) of that question does not apply?

AG Opinion

1. Article 2(1)(c) of Directive 2006/112/EC must be interpreted as meaning that the payment of a pre-determined amount in the case of early termination of a contract is liable to value added tax if it is to be regarded as consideration for the services already supplied and is not merely compensation for pecuniary damage sustained.

2. For the purposes of that interpretation, it is irrelevant that the commercial intermediary who negotiates such contracts with a tie-in period receives higher remuneration than for contracts without a tie-in period. It is also irrelevant that the amount may be regarded, under national law, as a contractual penalty.

Decision

1. 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 predetermined amount received by an economic operator where a contract for the supply of services with a minimum commitment period is terminated early by its customer or for a reason attributable to the customer, which corresponds to the amount that the operator would have received during that period in the absence of such termination — a matter which it is for the referring court to determine — must be regarded as the remuneration for a supply of services for consideration and subject, as such, to value added tax.

2. The fact that the objective of the lump sum is to discourage customers from not observing the minimum commitment period and to make good the damage that the operator suffers in the event of failure to observe that period, the fact that the remuneration received by a commercial agent for the conclusion of contracts stipulating a minimum period of commitment is higher than that provided for under contracts which do not stipulate such a period, and the fact that the amount invoiced is classified under national law as a penalty, are not decisive for classifying the amount predetermined in the services contract which the customer is liable to pay in the event of early termination.

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