In the wake of the corona pandemic, orders are currently being cancelled across the board, for example, for events of all kinds and the services provided in this context (catering, etc.). If a cancellation fee is paid to the contractor in such cases, the question arises as to whether this fee is subject to VAT or whether it constitutes non-taxable compensation.
In the VAT application ordinance, the tax authorities expressly refer solely to cancellation fees for travel services. In this context, a cancellation fee is to be treated as non-taxable compensation if the traveller withdraws from the travel contract before commencing the journey and in this case is obliged to pay compensation as agreed upon in advance in the travel contract. The question arises as to whether this also applies to other services, and/or on the basis of which criteria a distinction must be made between an exchange of services which is taxable and non-taxable performance and counter-performance.
In a ruling from 2010, the Federal Fiscal Court (BFH) decided that a so-called ‘provision fee’ (or ‘dead freight’ within the meaning of sec. 415 (2) of the German Commercial Code (HGB, Handelsgesetzbuch)) in the freight forwarding industry represents liquidated damages and is not subject to VAT. With recourse to the case law of the European Court of Justice (ECJ), the Federal Fiscal Court ultimately justified this by stating that the preparatory and planning work carried out by a contractor does not yet constitute definable performance for the client. As the ruling was published in the Federal Tax Gazette (BFH of 30 June 2010, file reference XI R 22/08, Federal Tax Gazette II 2010, p. 1084), these principles are generally applicable.
Result: It is therefore crucial whether the cancellation of an order is made in good time before the provision of the service commences or whether the contractor has already started to provide the service. Internal preparation and planning work alone do not in principle constitute definable performance, so that the cancellation fees in the event of cancellation of the order at this stage must be treated as non-taxable compensation.
Note: If the parties agree to terminate the contract in exchange for compensation during the provision of a time-related service, the amount paid for the period after termination may also constitute remuneration subject to VAT, for example, as consideration for non-performance of a certain act. It should also be noted that payments for a stand-by service (for instance, emergency services) also constitute remuneration subject to VAT even if the service is not used.
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