CJEU Case C-622/23: VAT Liability on Payments After Construction Contract Termination

Value-added tax (VAT) is a cornerstone of the European Union’s internal market and fiscal system. Its application is inherently linked to the principle of taxable transactions for consideration. But what happens when a service has only been partially performed due to the recipient’s actions? Should VAT still apply to a contractually agreed payment that (largely) covers services not ultimately delivered?

These legal and economic questions were addressed in the judgment of the Court of Justice of the European Union (CJEU) on 28 November 2024, in Case C-622/23. This ruling offers a fundamental clarification regarding the scope of Article 2(1)(c) of the VAT Directive 2006/112/EC in conjunction with Article 73, particularly in the context of payments following the premature termination of a construction contract by the client, where the contractor had already commenced work and was willing to complete it.

Facts and circumstances: A detailed reconstruction

In March 2018, two Austrian companies entered into a construction agreement: rhtb: projekt gmbh (hereinafter “rhtb”), a construction contractor, and Parkring 14-16 Immobilienverwaltung GmbH (hereinafter “Parkring”), a property management firm. The contract stipulated that rhtb would carry out a building project with a total value of €5,377,399.69, including €896,233.28 in VAT.

Rhtb commenced the work as agreed. However, in June 2018 – just a few months later – Parkring informed rhtb that it no longer wished for the project to be completed, for reasons that were not attributable to rhtb. As a result, rhtb was prevented from finalizing the project, despite being willing and ready to do so.

On 19 December 2018, invoking §1168(1) of the Austrian Civil Code (Allgemeines Bürgerliches Gesetzbuch, ABGB), rhtb demanded payment of the agreed contract price, reduced by the savings resulting from the non-performance of the remaining work. The claimed amount was €1,540,820.10, including VAT. Rhtb maintained that this amount did not constitute damages but was instead a consideration for a service that had been initiated and partially performed, thus falling within the VAT scope.

The lower court ruled in favor of rhtb, finding that the payment qualified as consideration for a taxable service. However, the appellate court overturned this ruling, holding that VAT was not due on services that had not been performed, since no reciprocal exchange had taken place.

Both parties then filed an appeal in cassation (Revision) with the Oberste Gerichtshof (Supreme Court of Austria), which referred the matter to the CJEU by way of a preliminary ruling due to uncertainties regarding the interpretation of Articles 2(1)(c) and 73 of the VAT Directive.

Legal framework: Relevant EU and national provisions

EU Law

The legal analysis centers on two core provisions of the VAT Directive 2006/112/EC:

• Article 2(1)(c) states that VAT is chargeable on the supply of services for consideration by a taxable person acting as such.

• Article 73 provides that the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier from the customer or a third party.

These provisions have been interpreted in multiple CJEU judgments. According to settled case law (e.g., C-154/80 Coöperatieve Aardappelenbewaarplaats, C-16/93 Tolsma, C-520/14 Gemeente Borsele, C-43/19 Vodafone Portugal), a supply of services is only made “for consideration” if there is a direct link between a specific and individualized service and the payment received.

Austrian Civil Law

Under §1168(1) ABGB, if a contract is terminated due to reasons attributable to the client, the contractor remains entitled to the agreed remuneration – less any savings resulting from non-performance or any gain that could have been earned elsewhere.

This provision is crucial because it frames the payment not as compensatory damages but as a continued entitlement to the contractually agreed remuneration.

The preliminary question

The Austrian Supreme Court posed the following question to the CJEU:

“Must Article 2(1)(c) of the [VAT Directive] read in conjunction with Article 73 of that directive be interpreted as meaning that the amount which a customer owes to a contractor even where the work has not been (fully) carried out, but the contractor was ready to provide the service and, through circumstances attributable to the customer (for example, cancellation of the work), was prevented from doing so, is subject to VAT?”

This question touches the heart of EU VAT law: when does a taxable event occur, and under what conditions can a payment be seen as a “supply for consideration”?

Judgment of the CJEU

The Court carefully dissected the question and emphasized both the contractual context and the underlying economic reality.

It reaffirmed that a service is performed “for consideration” when there exists a legal relationship with reciprocal obligations and the payment constitutes the actual remuneration for an identifiable service. The Court cited its prior judgment in Vodafone Portugal (C-43/19), where it held that the obligation to pay remains even when the customer does not avail themselves of the service, as long as the right to use it was granted.

The Court stressed that in this case, the contractor had not only granted the right to perform the service but had also commenced performance. The interruption of the service was due to the client's unilateral decision. Consequently, the contractually agreed payment (after deducting savings) remained directly linked to the service initiated and was thus taxable.

The Court dismissed the relevance of Société thermale d’Eugénie-les-Bains (C-277/05), where a forfeited deposit was deemed non-taxable compensation. In that case, the service (a hotel room reservation) had not been commenced and was not individualized. In contrast, rhtb had already begun specific work, and the payment was not compensatory in nature, but contractual and performance-related.

The CJEU concluded:

“Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that the amount contractually due following the termination, by the recipient of a supply of services, of a contract validly concluded for that supply of services, subject to value added tax, which the supplier had begun providing and which it was prepared to complete, must be regarded as constituting the remuneration for a supply of services for consideration, within the meaning of Directive 2006/112.”

Practical Implications

The judgment rendered in Case C-622/23 carries significant implications for the practical application of VAT law in contractual relationships, particularly where long-term service agreements or construction projects are concerned. It sheds important light on how tax authorities and courts should treat payments made after a contract is terminated – specifically when the termination is attributable to the client and the service provider was already engaged in performance.

At the heart of this ruling lies the affirmation that the mere fact that a service was not completed does not preclude the existence of a taxable event. What matters, instead, is whether the service provider had already begun performing and whether the payment made (or due) corresponds to a right that was conferred upon the client – namely, the right to have the service executed. Even if that right was ultimately not exercised in full due to the client’s own decision, it still has fiscal consequences under EU VAT law.

For businesses, this means that contractually agreed payments that reflect the value of services already initiated may not be treated as mere compensation or damages for lost profit. Rather, they are to be regarded as consideration for a service rendered under a binding legal relationship. Consequently, such payments fall within the material scope of the VAT Directive and are subject to VAT. The presence of a direct link between the payment and the (partially delivered) service is sufficient to trigger tax liability.

This interpretation places a renewed emphasis on how contracts are drafted and how rights and obligations are structured in service agreements. It encourages both service providers and recipients to assess the VAT consequences not just upon completion of a project, but also at every stage of execution and in any scenario involving early termination. In doing so, the judgment promotes legal certainty and ensures that the principles of neutrality and fiscal coherence in the EU VAT system are upheld – even in situations where economic activities are disrupted mid-course.

By confirming that such termination-related payments may indeed represent taxable consideration, the Court aligns its approach with commercial reality and provides valuable guidance for both taxpayers and national tax authorities. It reinforces the notion that VAT is a tax on consumption that must respond flexibly to the evolving dynamics of modern contract law and service delivery.

Conclusion

The CJEU’s judgment in Case C-622/23 clarifies that a payment owed under a validly terminated service contract – where the provider had begun and was willing to complete performance – is subject to VAT, provided it reflects a contractual right and a commenced service. The decision highlights that VAT liability is not limited to completed services but extends to situations where a service has been initiated and interrupted due to the client’s own decision. This interpretation reinforces the importance of the legal and economic context in assessing VAT obligations and provides practical certainty for businesses operating under long-term service agreements.

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