The Europäischer Gerichtshof (EuGH, Court of Justice of the European Union) has clarified the VAT treatment of a payment following the early termination of a service contract. According to the Court, an amount contractually owed must be regarded as consideration for a service if the service provider had already begun performance and was prepared to complete it (EuGH, judgment of 28 November 2024 – C-622/23 (case number)).
VAT Classification of Early Contract Terminations
Decision of the Europäischer Gerichtshof
The judgment was delivered by the Seventh Chamber following a request for a preliminary ruling from the Oberster Gerichtshof (Austrian Supreme Court). The proceedings concerned a dispute between rhtb: projekt gmbh and Parkring 14-16 Immobilienverwaltung GmbH.
In March 2018, the parties had entered into a contract for work and services. After the work had already begun, Parkring stated in June 2018 that the project was not to be continued. In December 2018, rhtb claimed payment on the basis of § 1168 Abs. 1 Satz 1 des österreichischen Allgemeinen Bürgerlichen Gesetzbuchs (Section 1168(1), first sentence, of the Austrian General Civil Code).
The EuGH classified the amount contractually owed as consideration for a service within the meaning of the VAT Directive. The decisive factor was that the following conditions were met:
- The contract for the provision of the taxable service had been validly concluded.
- The service provider had begun contractual performance.
- The service provider remained prepared to provide the agreed service in full.
- The recipient of the service had terminated the contract.
In doing so, the Court followed its previous case law concerning the circumstances in which a payment described as compensation constitutes consideration for a service for VAT purposes. The EuGH had previously addressed this issue in its judgment of 11 June 2020 – C-43/19 (case number).
Distinction from Terminated Contracts for the Supply of Work and Materials
Position of the Bundesministerium der Finanzen
The Bundesministerium der Finanzen (BMF, German Federal Ministry of Finance) distinguishes the EuGH decision from the case law of the Bundesfinanzhof (BFH, German Federal Fiscal Court) concerning contracts for the supply of work and materials. That case law concerns remuneration received by a business following termination or contractual cancellation, even though neither the materials provided nor the partially completed work were delivered to the customer. The relevant classification is set out in Abschnitt 1.3 Abs. 5 des Umsatzsteuer-Anwendungserlasses (Section 1.3(5) of the German VAT Application Decree).
According to the BMF, the civil-law structure of a contract for the supply of work and materials means that a transaction subject to VAT arises only when the right to dispose of the item manufactured for the customer is transferred. Work and physical resources used by the business to manufacture goods before delivery therefore form part of its internal operations. Taken on their own, they do not constitute supplies that are relevant for VAT purposes.
No Supply Within the Meaning of the Umsatzsteuergesetz
If the contract for the supply of work and materials is terminated before the right to dispose of the manufactured or partially manufactured item is transferred, the amounts received are not matched by any supply within the meaning of § 1 UStG (Section 1 of the German Value Added Tax Act) under this assessment. For VAT purposes, the decisive factor is generally the supply of goods or services, rather than merely the receipt of consideration.
If there is no taxable supply, the amount is consequently not subject to VAT. This distinction is consistent with the case law of the Bundesfinanzhof (BFH, judgment of 27 August 1970 – V R 159/66 (case number)).
Amendment of the Umsatzsteuer-Anwendungserlass
New Section on Service Contracts
By letter dated 12 November 2026 – III C 2 – S 7100/00100/008/035 (reference number), the BMF incorporated the EuGH case law into the Umsatzsteuer-Anwendungserlass. Under Abschnitt 1.3 Abs. 16c UStAE (Section 1.3(16c) of the German VAT Application Decree), a new paragraph 16d is inserted.
Accordingly, a payment contractually owed constitutes consideration for a supply of services if the recipient terminates a validly concluded contract for taxable services even though the service provider had already begun performance and was prepared to complete it. The provision expressly refers to the EuGH judgment in case C-622/23.
The immediately preceding Abschnitt 1.3 Abs. 16c UStAE concerns compensation payments to telecommunications providers. It was inserted by the BMF letter of 18 October 2024 – III C 2 – S 7100/19/10004 :007 (reference number), which refers to the BMF letter of 8 October 2024 and applies to all pending cases.
The Type of Contract Is Decisive
The VAT treatment therefore depends on the specific contractual relationship. In the case of a service contract, a payment that remains due despite termination may constitute consideration for a supply of services, provided that the conditions specified by the EuGH are met. By contrast, in the case of a contract for the supply of work and materials, the BMF considers that there is no taxable supply if the right to dispose of the manufactured item has not been transferred.
The relevant factors for classification include, in particular, the type of contract, the stage of performance, the provider’s readiness to perform and the legal basis for the payment. Businesses and other affected parties can have questions concerning the VAT treatment of contractual relationships terminated early reviewed by MTR Legal as part of its tax law advisory services.
