On July 18, 2007, the ECJ issued its decision in the case C-277/05 (Société thermale d’Eugénie-Les-Bains). This case deals whether advances paid under contracts for services are subject to VAT if retained by the service provider in the event of cancellation.
Context: VAT – Scope – Deposits, paid in the context of contracts relating to supplies of services subject to VAT, which are retained by the provider in the event of cancellation – Classification). REFERENCE for a preliminary ruling under Article 234 EC from the Conseil d’État (France), made by decision of 18 May 2005, received at the Court on 5 July 2005, in the proceedings
Article in the EU VAT Directive
Articles 2(1) and 6(1) of Sixth Council Directive 77/388/EEC
Facts
- Société thermale, a company established in Eugénie-les-Bains (France), is engaged in the operation of thermal establishments, including the provision of hotel and restaurant facilities. It collects, by way of deposits, sums paid in advance by clients of those establishments when reserving rooms. Those sums are either deducted from the amount to be paid for the accommodation later or retained by the company in cases where clients cancel their reservations.
- In 1992, Société thermale underwent an accounting inspection in relation to the period from 1 January 1989 to 30 April 1992. As a result of that inspection, the tax authorities formed the view that VAT should have been applied to the deposits which the company had collected from the client at the time of making room reservations and retained where the client cancelled the reservation. On 8 December 1994, the company was accordingly charged the sum of FRF 84 054 (EUR 12 814) by way of supplementary tax payable for the period in question. Société thermale filed a complaint, which was dismissed by the tax authorities on 14 February 1995.
- Société thermale brought an action against that decision before the Tribunal administratif de Pau (Administrative Court, Pau). That action was dismissed by judgment of 18 November 1999. The Tribunal administrative de Pau held that, where a deposit is retained by the company in the event of cancellation by the client, it constitutes the remuneration for the supply of a service consisting in client reception formalities, opening a booking file for the client and entering into an undertaking to reserve accommodation for him.
- Société thermale brought an appeal before the Cour administrative d’appel de Bordeaux (Administrative Court of Appeal, Bordeaux) which, by judgment of 18 November 2003, dismissed that appeal. As a basis for ruling that VAT should have been applied to deposits paid by Société thermale’s clients and retained by the company where the reservation was cancelled, that court held that such deposits had to be regarded, in those circumstances, as the direct consideration and the remuneration for the supply of identifiable services consisting in the opening of a client file and the reservation of accommodation for that client.
- Société thermale applied to the Conseil d’État (Council of State) to have that judgment set aside, maintaining that the deposits must be regarded as payments made by way of compensation for its loss as a result of client default and, as such, not subject to VAT.
Questions
Must sums paid as deposits in the context of sales contracts in relation to the provision of services which are subject to value added tax be regarded, where the purchaser makes use of the cancellation option available to him and those sums are retained by the vendor, as remuneration for the reservation service and, as such, subject to value added tax, or as cancellation payments made to compensate for the loss suffered as a result of the default of the customer, which have no direct connection with any service provided for consideration and, as such, are not subject to value added tax?
AG Opinion
Articles 2(1) and 6(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes — Common system of value added tax: uniform basis of assessment are to be interpreted as meaning that sums paid as deposits in the context of sales contracts in relation to supplies of hotel services which are subject to value added tax must be regarded, where the purchaser makes use of the cancellation option available to him and those sums are retained by the vendor, as remuneration for the reservation service and, as such, subject to value added tax.
Decision
Articles 2(1) and 6(1) of Sixth Council Directive 77/388/EEC of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes – Common system of value added tax: uniform basis of assessment are to be interpreted as meaning that a sum paid as a deposit, in the context of a contract relating to the supply of hotel services which is subject to value added tax, is to be regarded, where the client exercises the cancellation option available to him and that sum is retained by the hotelier, as a fixed cancellation charge paid as compensation for the loss suffered as a result of client default and which has no direct connection with the supply of any service for consideration and, as such, is not subject to that tax.
Summary
Amounts paid in advance for VAT-taxed hotel services, in cases where the customer exercises their right of cancellation and the hotel operator retains the amounts, should be considered as lump sum indemnification for dissolution to compensate for the damage suffered as a result of the customer’s non-performance, without direct connection with any service provided for consideration, so that these amounts are not taxed with VAT.
Source
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