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V0491-20 27 February 2020 · SG de Impuestos sobre el Consumo Criterion in force
IVA · base imponible

Compensation for early contract termination is not subject to VAT

A security company has enquired whether VAT should be applied to compensation received when clients terminate contracts before the agreed minimum term. The Directorate General for Taxes (DGT) has ruled that these amounts are not subject to VAT because they do not constitute consideration for a service, but rather compensation for damages.

The question raised

Liability for Value Added Tax on the described compensation.

The DGT's ruling

Compensation for breach of a stay clause does not form part of the VAT taxable amount. As it does not constitute consideration or compensation for the supply of goods or services, it does not represent an act of consumption. Therefore, it is not appropriate to charge tax on such amounts.

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