The use of a form of compensation in contractual relations does not always imply confirmation of the fiscal neutrality of such provision from the point of view of the provisions on the tax on goods and services.
The payment, on the basis of a court settlement, of compensation which is a substrate for a particular contract of remuneration subject to tax on goods and services may be taxed on goods and services.
The definition of the remuneration contained in the contract as a ‘compensation’ in proceedings relating to the failure to carry out a given contract for the conclusion of a judicial settlement does not invalidate the fact that it is related to the pursuit of economic activities and activities taxed on goods and services.
The compensation paid may serve as payment for the operations carried out and should therefore be treated in the same way as the remuneration due under the contract concluded.
Obtaining compensation on the basis of a court settlement concluded in the course of the conciliation procedure does not in itself alter the legal nature of the claim and does not affect the taxation of the claim with tax on goods and services.
The debtor shall be obliged to make good the damage resulting from the default or breach of the obligation, unless the failure or improper execution is due to circumstances for which the debtor is not liable.
According to Article 8(1) Act on the taxation of goods and services by the provision of services referred to in Article 5(1)(1), any benefit to a natural person, a legal person or an entity not having legal personality which does not constitute a supply of goods within the meaning of Article 7.
This means that the legislator has linked the subject of taxation to an active benefit to another entity (action).
Therefore, it is not subject to a duty on goods and services, for example, compensation for prior termination of the contract, but the identification of active activities during the implementation of the commission contract may be considered as provision of services.
This is also confirmed by the Supreme Administrative Court, which in its judgment of 8 May 2012 (Act number. 1116/11) states that "the compensation which is in fact the payment for the works performed (here - the services rendered) is taxable."
The term ‘compensation’ is not defined in the VAT Act. The rules on compensation are contained in the Civil Code.
According to Article 471 The Civil Code ‘the debtor is obliged to make good the damage resulting from the default or breach of the obligation, unless the failure or improper execution is a consequence of circumstances for which the debtor is not liable’.
Under civil law, compensation for the damage suffered depends on the occurrence of an event with which the provisions combine the obligation to remedy the damage. Furthermore, there must be a causal link between the event and the damage it caused.
The nature of the compensation is therefore not the payment for the benefit but the compensation for the damage. In such a case, we do not have an equivalent transaction – a benefit in return for remuneration, which means that the compensation received does not involve any benefit from the taxpayer.
Nor is this payment related to an obligation of the recipient of the amount in question to perform the activity, to refrain from carrying out the activity or to tolerate the activity or situation.
The determination of the status of compensation paid as taxable or non-taxable in respect of goods and services should be assessed in the context of the relationship with the specific provision.
Therefore, where compensation payments are not directly linked to any activity of the nature of the benefit on the part of the obliged entity, the amount of compensation received will not be included in the list of activities listed in Article 5(1)(1) The Goods and Services Tax Act and as such it will not be subject to that tax.
If the value received by the contracting party is closely linked to the benefit of the contracting party using the services of the taxable person in the form of toleration of the situation, the compensation received on the basis of a settlement is not compensation but a form of compensation for the provision of services within the meaning of Article 8(1) Goods and Services Tax Act. Consequently, they are taxable according to Article 5(1)(1) Acts of the acts for which it was paid.