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V0132-22 25 January 2022 · SG de Impuestos sobre el Consumo Criterion in force
IVA · base imponible

Compensation for early contract termination to offset loss of profits is not subject to VAT

A company sought clarification on whether compensation paid for the unilateral and early termination of a service contract was subject to VAT. The DGT ruled that, as its purpose is to compensate for loss of profits rather than to remunerate a provision of services, it does not constitute a transaction subject to the tax.

The question raised

Liability for Value Added Tax on the amount paid to the applicant.

The DGT's ruling

The compensation derived from the unilateral and early termination of a service contract, intended to compensate for loss of profits, does not constitute consideration for the supply of goods or services. As there is no exchange of reciprocal considerations nor an act of consumption, the amount is not subject to VAT. Therefore, the entity receiving the compensation must not charge the tax nor is it obliged to issue an invoice.

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