CJEU: MEO – Serviços de Comunicações e Multimédia SA v. Autoridade Tributária e Aduaneira (C-295/17)

By this judgment of 22 November 2018, the ECJ held that in cases where the minimal duration period of an agreement is not honored due to an omission by the customer, and the customer is therefore obliged to pay an amount — which is equal to the monthly fee multiplied by the remaining amount of months as set in the agreement — such an amount is not regarded as consideration for damages and is therefore subject to VAT.

Background

In the case at hand, MEO was a taxable person established in Portugal, offering telecommunication services to customers. MEO entered into agreements with its customers in order to supply the telecommunications, internet access, television and multimedia services. There were two types of agreements, one with a minimal duration period and one without a minimal duration period. Customers who chose the agreement with a minimal duration period received favorable conditions such as lower monthly fees.

MEO had the option to stop providing services to a customer in circumstances where the customer did not honor the agreement, where for example the customer failed to pay the monthly fees. The customer would then however be required to pay an amount equal to the monthly fee multiplied by the remaining amount of months as set in the agreement — as a "compensation".

Whilst it did charge VAT on the monthly fees that were paid by the customers, MEO took the view that the compensations are not subject to VAT. The tax authorities subsequently took the opposing view — that the compensations should have been subject to VAT as well.

The main question posed by the Portuguese referring court was therefore whether this compensation should be considered a compensation for damages — and therefore not subject to VAT — even though the amount is equal to the monthly fee multiplied by the remaining amount of months as set in the agreement.

Judgment

The ECJ stipulated that MEO received the same amount regardless of whether the agreement was ended and that the economic reality of the agreement between MEO and the customer did not change. As a result, the ECJ decided that the "compensation" payment was in fact the consideration for the right to use the services of MEO as resulting from the agreement.

The ECJ decided that the services and the fees were already determined at the time the agreements were signed and, therefore, the compensation payment was an integral part of the total price which was to be paid by the customer. MEO would receive the exact same amount due to the consideration as if the customer did honor the agreement. If the amount was to be qualified as a compensation for damages, the amounts would be treated differently while in principle, there is no distinction to be made.

Practical implications

This case implies that a consideration for damages is not in place in circumstances where the parties have already agreed upon the total price and the agreement contains a clause as a result of which the service provider, in principle, receives the exact same amount if the agreement is ended before the fixed duration period — even though the service provider does not actually perform its services for the remaining duration of the agreement.

In circumstances where you are dealing with agreements containing a minimal duration period and a fixed payable amount which the service provider will receive, it should be taken into consideration that the total amount is subject to VAT, even if the agreement ends before the minimal duration period as agreed upon.