The amounts paid to the landlord under a lease agreement for early termination of a fixed-term contract should not be considered as compensation - so ruled the Regional Administrative Court in Warsaw in its judgment of October 17, 2014 (ref. No. III SA/Wa 1230/14).
Judgment was given on the basis of the following facts. The Company, as a landlord, concluded with tenant a settlement under which a lease agreement was terminated. Due to the termination of the lease agreement, the tenant agreed to pay a certain amount of compensation, which was connected with lost benefits, however, that amount was lower than the sum of rents, which were due to the Company until the end of the lease period. The Company claimed that due amount is not subject to VAT, because it is not associated with the provision of services and it should be treated as compensation which do not fall under taxation.
The court found this approach to be incorrect and pointed out that the amount paid to the Company is connected with the lease agreement. In court’s view, in this case we have to deal with a kind of remuneration for the Company for giving approval to early termination of the contract and not with the compensation when any losses are only hypothetical.
This judgment properly draws attention to the fact that in order to determine whether the payment which was made in connection with the early termination of the lease agreement fall under VAT taxation, it is necessary to examine its nature. If we deal with a sanction fee or compensation for real loss or costs incurred by the landlord, such fee is not subject to VAT. However, if fee is paid just for consent for early termination of the contract - VAT should be charged. Each case therefore requires individual assessment.
