Contractual penalty with VAT


Breaking the contract or failure to meet deadlines may have consequences such as the need to pay a contractual penalty to the contractor.

Tax authorities - VAT on contractual penalties

Until now, it was believed that such a benefit is not subject to tax on goods and services because it is not a returnable payment. However, the tax authorities are of a different opinion, stating that receiving payment for early withdrawal from the lease agreement is associated with receiving remuneration for the action called as consent to early withdrawal. Therefore, as it results from the VAT Act - the paid services are subject to VAT.

What does WSA say?

This is confirmed by the position presented by the Provincial Administrative Court in Warsaw in the judgment of February 15, 2013 (file reference number III SA / Wa 1882/12). It stated that the parties to the lease agreement agreed on the terms on which the contract is to be performed, in which there is only a provision of exercising the right to early termination of the contract and at the same time there is no question that the termination takes place in connection with failure to perform a specific action or breach of the agreed terms. Then, the paid amount with the related contractual penalty should also be considered an element of remuneration:

"(...) the amounts paid on the basis of such contracts, resulting directly from the content of these contracts - although they are called contractual penalties or damages - are in fact a part of the settlement under the lease agreement, a kind of" compensation ", payment for the contractor's consent to the law for early withdrawal from the contract. They are subject to value added tax and should be documented with VAT invoices. (...) "

Differently individual interpretation

It is worth noting, however, that in this matter there was also a different position in the individual interpretation of the Director of the Tax Chamber in Warsaw of March 15, 2013 (IPPP1 / 443-1251 / 12-4 / AP). In his opinion “(...) in the case in question, the payment of the compensation amount will constitute compensation for the Lessor as the party affected by the non-performance or improper performance of the contract and does not involve the performance of the benefit by the Lessor. Thus, as a contractual penalty serving as a compensation (compensation) for the losses suffered, it is not included in the catalog of taxable activities listed in Art. 5 sec. 1 of the VAT Act, therefore, they are not subject to taxation. "

As can be seen in the two different interpretations cited in the case concerning taxation with tax on goods and services, contractual penalties for early withdrawal from the lease agreement - this is a controversial issue. This raises many doubts among taxpayers in the manner of settling the situation in accordance with the VAT regulations. The most advantageous solution in this situation will be an in-depth analysis of the provisions of the contract covering the payment of the contractual penalty, and in case of doubts, apply for an individual interpretation.