Compensation for loss of profit – VAT treatment depends on details of legal agreement
The State Fiscal Service of Ukraine (SFSU) has issued a clarification on the VAT treatment of compensation for loss of profit payable to a non-resident due to an early termination of agreement. In the case being considered, the non-resident supplied software development services to a Ukrainian resident. When the latter terminated the service agreement, the non-resident supplier was compensated for the loss of profit.
As the taxpayer in this case did not furnish tax authorities with proper documents of the underlying transaction, SFSU refused to clarify whether a loss of profit compensation is subject to VAT. However, SFSU emphasised that the definitive conclusion as to the VAT treatment of loss of profit must be based on the relevant provisions of services agreement and supporting documents.
DLA Piper Comment: Considering the response of SFSU in this case and the lack of relevant court judgement, it is necessary to pay due attention to liability clauses where loss of profit provisions are envisaged when drafting service agreements.