VAT taxation of money obtained as a result of non-competition

Service-Tax

Very often the managers of the enterprise are related to the company through concluded contracts. They are therefore not employees, but service providers who carry out economic activity. Handing over business management into the hands of a manager is associated with a huge risk, because he has access to all the most important information about the company. This includes the technologies used, signed contracts or development plans. A good manager can be a treasure for a company, but also a huge threat. After the end of the contract, he could be employed by a competing company and act to the disadvantage of the previous customer. In such cases, non-competition agreements are signed. The manager will be required to refrain from engaging in competitive activities in return for compensation.

Is the compensation subject to VAT?

This question should be asked by all managers who are active VAT payers. The crucial question is whether refraining from engaging in competitive activities can be considered a service. Pursuant to Art. 8 of the VAT Act, the provision of services is understood as any service for a natural person, legal person or organizational unit without legal personality that does not constitute a supply of goods, including an obligation to refrain from performing an action or to tolerate an action or situation. The last part of the sentence definitely refers to the non-competition clause.

In order for an activity to be called a service, there must also be a consumer who will benefit from a financial benefit. In this case, the manager, as the recipient of the benefit, gains a benefit in the form of compensation. The benefit is in cash and, in addition, there is a clear link between the recipient and the payee. They are bound by a concluded contract. Refraining from engaging in competitive activities can therefore be considered a service.

If the manager is an active VAT tax, he will be obliged to pay VAT on the money received. At this point, we can quote a fragment of the individual interpretation issued on February 28, 2013 by the Director of the Tax Chamber in Katowice (reference number IBPP4 / 443-94 / 13 / EK):

“(...) the act of refraining from competitive activity for the company in return for remuneration is payable. It should be noted that the facts indicate that the parties have a legal relationship, moreover, the non-competition agreement was concluded by the Applicant as a taxpayer of the tax on goods and services (thus the Applicant did not use the exemption under Article 15 par. 3 of the Value Added Tax Act), and the remuneration received for refraining from performing certain activities, which was determined by compensation, is an equivalent for a specific service, which in the present case is refraining from activities competitive to the company. On the other hand, the beneficiary of the service, due to the obligation (guarantee) obtained in this way, not to conduct competitive activities by the Applicant, is the company. Consequently, it should be considered that the received compensation, related to the economic activity conducted by the Applicant (as this activity was a part of a non-competition agreement), pursuant to Art. 8 sec. 1 of the act on tax on goods and services is the provision of services subject to tax on goods and services.

Therefore, the services provided by the Applicant on the basis of the agreement on refraining from conducting competitive activities should be considered as the paid services within the meaning of the VAT Act, which are subject to this tax. (...) "