On September 4, 2014 the Supreme Administrative Court (NSA) ruled in case no. I FSK 1310/13 that a business partner agreeing to enter into an agreement on specific terms and conditions renders a service in the meaning of Article 8 Section 1 of the VAT Act.
In the case considered by the NSA, a company offered its business partners remuneration (motivation fee) for entering into trade agreements requiring the business partners to:
- Purchase at least a minimum quantity of goods from the company (and from the company’s subsidiary), as set out in the agreement
- Conclude a franchise agreement with the company and open an outlet as part of the company’s franchise chain
- Comply with rules for handling pallets and other reusable packaging set out in the agreement.
In the event of early termination of the trade agreement, for whatever reason, or the business partner losing the legal title to the outlet premises, the company is entitled to claim payment of the basic and additional fees and seek additional compensation according to the general principles of law.
The NSA found that the remuneration at issue is a typical loyalty prize for the performance of contractual obligations by business partners. This interpretation is suggested by the chronology of events: the company pays the motivation fee to the business partner when executing the trade agreement, and if the business partner later fails to fulfill its contractual obligations, it must pay the company a basic and an additional fee. The NSA held that the parties to a trade agreement of this kind render mutual performances to one another, which are services in the meaning of Article 8 Section 1 of the VAT Act.
This ruling is in line with others handed down in similar cases. The NSA has repeatedly ruled that remuneration for entering into agreements paid to business partners may be subject to VAT if reciprocal performance by the latter can be identified (cf. e.g. the ruling of July 2, 2013 in case no. I FSK 1218/12). This time the NSA elaborated on its position, indicating the contractual provisions that suggesting the equivalent nature of the performances rendered by the business partners. The circumstance seen as decisive by the NSA is the business partner’s financial liability for failure to fulfill its contractual obligations. This liability was key in determining that the motivation fee is in fact payment for specific actions to be taken by the business partner. The a contrario conclusion from this ruling is that if the business partner were to receive a motivation fee while not being liable for non-performance of the obligations it took upon itself in consideration of this fee, it would not in fact be rendering a service.
The above circumstance had not been relied on previously by administrative courts when determining the existence or otherwise of services rendered by business partners. If this new approach demonstrated by the NSA becomes prevalent in practice, it would have to be taken into account when drawing up agreements with business partners, such as agreements for the lease of office or retail premises, or other agreements providing for remuneration to business partners which are also clients purchasing the principal goods or services from the other party. Taxpayers are advised to follow future developments in this area and review their existing agreements with business partners for compliance with VAT rules in respect of the kind of fees considered here.