Termination fees often subject to VAT
Following a ruling of the CJEU, termination fees in the event of early termination of a contract are often triggering VAT. Especially in B2C-situations, were the customer does not have a right to recover VAT, such VAT is likely to result in a significant VAT burden for businesses.

Vodafone Portugal
On June 11, 2020 the CJEU issued its long-awaited judgement in the Vodafone Portugal case (C-43/19). In the context of its business activities, Vodafone Portugal concluded various contracts with its customers for rendering e-commerce services. Some contracts included special promotions subject to the condition for the customers to agree upon a minimum contract period. Failure by the customers to comply with such tie-in period resulted in them having to pay a termination fee amounting to certain pre-determined costs, computed in accordance with Portuguese legislation.
The CJEU was asked to rule as to whether the termination fees would be subject to or free from VAT. In short, the CJEU decided that the termination fees at hand are subject to VAT, for the reason that the termination fees (i) have been pre-agreed upon and (ii) equal a certain statutory cost base. It remains uncertain whether terminations fees would be free from VAT, if the termination fees would not have been pre-determined or would have served as a compensation of damages.
Practical impact
In many industries, not only e-commerce, non-compliance with contractual obligations often results in the customer having to pay termination fees. From the Vodafone Portugal case, it can be derived that termination fees are often triggering VAT. However, we feel that – under certain conditions – termination fees could still be free from VAT. We would therefore recommend to (timely) conduct a brief VAT check on non-compliance / early termination clauses in commercial agreements.
Need help?
Our advisers of the Loyens & Loeff Indirect Tax team are happy to be of assistance should have any question or require further information.
Bart Heijnen
Senior associate Tax adviserBart Heijnen, tax adviser, has been working in the Indirect Tax practice of Loyens & Loeff since 2008.
T: +31 20 578 53 77 M: +31 651 01 89 99 E: bart.heijnen@loyensloeff.comTrudy Perié
Counsel Tax adviserTrudy Perié is a member of the VAT, customs and international trade practice group.
T: +31 20 578 54 99 M: +31 6 53 47 96 95 E: trudy.perie@loyensloeff.comTim van Montfort
Associate Tax adviserTim van Montfort, tax adviser, is a member of the Indirect Tax practice group.
T: +31 20 578 53 55 M: +31 6 22 79 56 01 E: tim.van.montfort@loyensloeff.comElise Theys
Associate Attorney at lawElise Theys, attorney at law, is a member of the Indirect Tax practice group of Loyens & Loeff in Belgium.
T: +32 2 743 43 02 E: elise.theys@loyensloeff.comOlivier Coulon
Attorney at Law Senior AssociateOlivier Coulon, senior associate, is a member of the Tax and VAT Team in our Luxembourg and Brussels offices. He focuses on indirect tax and international trade.
T: +352 466 230 303 E: olivier.coulon@loyensloeff.com