Amounts received by a supplier in the event of early termination by the customer
Vodafone Portugal supplies electronic communications services, fixed telephony and wireless internet access. It concludes with its customers services contracts, some of which include special promotions subject to conditions which tie those customers in for a predetermined minimum period. Failure by customers to comply with the tie-in period for reasons attributable to themselves results in them paying the amounts provided for in the contracts.
Do the amounts received by a supplier in the event of early termination, for reasons specific to the customer, must be regarded as the remuneration for a supply of services for consideration? In other words, are these amounts subject to VAT or not?
On the one hand, Vodafone commits to providing to its customers the supplies of services agreed in the contracts concluded with them and under the conditions stipulated in those contracts. On the other hand, its customers commit to paying the monthly instalments provided for under those contracts and also, if necessary, the amounts due where those contracts are terminated before the end of the tie-in period for reasons specific to those customers.
According to the European Court of Justice, those amounts must be considered to represent part of the cost of the service which the provider committed to supplying to its customers, that part having being reabsorbed within the monthly instalments, where the tie-in period is not complied with by those customers. In those circumstances, the purpose of those amounts is analogous to that of the monthly instalments which would, in principle, have been payable if the customers had not benefited from the commercial benefits conditional upon compliance with the tie-in period.
It must therefore be held that from the perspective of economic reality, which constitutes a fundamental criterion for the application of the common system of VAT, the amount due upon the early termination of the contract seeks to guarantee the operator a minimum contractual remuneration for the service provided. It must be considered to form part of the remuneration received by Vodafone for the services.
The Court is of the opinion that its own judgement in the “Société thermale d’Eugénie-Les-Bains” case (C-277/05 dd. 18/07/2007) does not apply in the case at hand because the amount paid for the early termination does not constitute a compensation or indemnification as such. The amount paid in the event of early termination must be considered an integral part of the price which the customer committed to paying for the services of Vodafone.
As a consequence, the amounts received by a supplier in the event of early termination, for reasons specific to the customer, of a services contract requiring compliance with a tie-in period in exchange for granting that customer advantageous commercial conditions, are subject to VAT.