Comments on ECJ C-622/23: VAT Liability After Unilateral Contract Termination in Construction Projects

Unjustified termination of a service contract subjects the incomplete service to VAT.
The taxable base is the amount agreed upon by the parties.
This principle was affirmed by the European Court of Justice in case C-622/23.
The case involved the construction of a real estate complex between two companies with a contract that included a total fee (including VAT) and conditions for non-fulfillment.
Three months after signing, the client unilaterally terminated the contract, citing reasons unrelated to the contractor.
The contractor is entitled to the agreed fee if they were ready to perform the work, and the inability to complete it was due to the client’s actions.
The contractor claims payment of the agreed amount, minus savings from the contract termination.
A court ruled that the contractor is entitled to the full agreed fee but referred to the European Court of Justice to determine if this amount qualifies as “consideration” under Directive 2006/112/EC.
The European Court examines conditions for a service to be considered “for consideration” and thus subject to VAT, as per Article 2 of Directive 2006/112/EC.
The requirement of consideration is met only when there is a legal relationship between the provider and the recipient.