Payment of contractual fine for delay in execution of work to be treated as out of scope indemnity payment for VAT purposes
On 25 October 2017 the Belgian VAT authorities clarified in a Circular Letter that payments specifically made to repair damage caused by a delay in the execution of work have the nature of an indemnity payment. These payments thus fall outside the scope of application of VAT and should not be treated as price reductions that reduce the taxable base.
Since contractual fines for delays in the execution of work are often agreed upon when concluding agreements regarding the execution of immovable works or regarding public real estate tenders, the VAT authorities felt the urge to issue guidance in this respect.
Admittedly, it is often difficult to determine whether the payment of a contractual fine should be considered as an indemnity payment (out of scope of VAT) or as a remuneration for a service existing in the other contractual party doing or not doing something. This is especially the case when confronted with complex service agreements and management agreements. Generally speaking, a contractual fine is only to be considered as an out of scope indemnity payment if it aims to repair a damage caused by an act or omission by the other contractual party. The wording of the indemnity clauses and the correct classification of the payment remain thus extremely important for the determination of the VAT treatment.
Please do not hesitate to reach out to the Loyens & Loeff indirect tax team if you would have any questions in this respect.