ECJ VAT Case C-622/23 (RHTB) – Judgment – VAT Implications in Work Contract Cancellations

On November 21, 2024, the ECJ issued its decision in the case C-622/23 (RHTB).

Context: Reference for a preliminary ruling – Common system of value added tax (VAT) – Directive 2006/112/EC – Article 2(1)(c) – Scope – Taxable transactions – Contract for services for the carrying out of a building project – Termination of the contract by the customer – Concept of ‘remuneration’ – Characterisation – Obligation to pay the total amount agreed after deduction of the costs saved by the supplier – Article 73 – Taxable amount

Summary

Case Context: The case involves a dispute between rhtb: projekt gmbh and Parkring 14-16 Immobilienverwaltung GmbH regarding the application of VAT on the amount due after Parkring unjustifiably terminated a building project contract that rhtb had already begun.
Legal Framework: The Court interprets Article 2(1)(c) and Article 73 of the VAT Directive, which govern the scope of VAT on services and the taxable amount, asserting that services must be supplied for consideration to be subject to VAT.
Key Judgment: The Court rules that the amount owed to a contractor after a contract is terminated, even if the work is not completed, is considered remuneration for a supply of services and is subject to VAT, provided the contractor was prepared to complete the service.
Direct Link Requirement: The Court emphasizes that there is a direct link between the service provided and the remuneration due, as the contractor had initiated the service and was ready to fulfill the contract despite the customer’s termination.
Conclusion: The Court concludes that the VAT Directive should be interpreted to mean that contractually due amounts, following an unjustified termination by the customer, constitute taxable remuneration, aligning with the economic reality of the service supply relationship.

Articles in the EU VAT Directive

Articles 2, 9, 24, 73 of the EU VAT Directive 2006/112/EC.

Article 2(1)(c)

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 73 (Taxable amount – Supply of goods or services)

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

The parties entered into a work contract agreement in 2018, in which it was agreed that the applicant, rhtb: projekt gmbh, would carry out work as a contractor for the defendant, Parkring 14-16 Immobilienverwertung GmbH. After the applicant had started work, the defendant informed the applicant that it no longer wished to use the applicant’s services. The reason for the termination was that the director of the defendant had, among other things, requested a quote from the other company that was more advantageous. The applicant has drawn up a final settlement due to unjustified cancellation of the work. The judge at first instance granted the claim. The appellate court amended the first judgment and rejected an additional claim. The highest federal court has dismissed the defendant’s appeal on Revision, but has yet to rule on the applicant’s appeal on Revision.

Consideration:

According to the Austrian view, the claim submitted would not be subject to VAT and therefore the applicant’s appeal on Revision – only with regard to the VAT included in the claim – would not be well-founded. In the light of the recent case law of the Court, the referring court has doubts as to the compatibility with EU law of situations similar to the present one. The Court has held, inter alia, that Article 2(1)(c) of Directive 2006/112/EC must be interpreted as meaning that consideration for a service provided for consideration within the meaning of that provision must be regarded as the amounts received by an economic operator when a service contract requiring a customer to comply with a minimum contractual term in return for favorable commercial conditions is terminated prematurely for reasons attributable to that customer. According to the referring court, the facts of the cited judgments of the Court differ from those of the present case.

Source ecer.minbuza.nl

Questions

Must Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax, read in conjunction with Article 73 of that directive, be interpreted as meaning that the amount that a client must also pay to the contractor if the work is not (completely) carried out, but the contractor was prepared to carry out the work and due to circumstances attributable to the client (for example the cancellation of the work) ) is prevented from doing so, is subject to VAT?

AG Opinion

None

Judgment

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 amount contractually due following the termination, by the recipient of a supply of services, of a contract validly concluded for that supply of services, subject to value added tax, which the supplier had begun providing and which it was prepared to complete, must be regarded as constituting the remuneration for a supply of services for consideration, within the meaning of Directive 2006/112.

Source