VAT and lease termination payments: a welcome explanation

Determining the applicable VAT system for termination payments is the source of numerous adjustments by the tax authorities. In this area, the latter deals with both losses suffered by the tenant and services rendered by the latter.

The Council of State has recently provided helpful clarification on VAT related processing of early termination payments for commercial leases (27th February 2015, 9th sub-section, SCI Catleya). On purchasing commercial premises, the real estate investment company – the landlord – concluded an agreement with the lessee, under the terms of which the current lease was terminated early, in return for the payment of compensation. At the same time, the real estate investment company – the landlord – signed a new lease with another company under more favourable market conditions.

The authorities questioned the deduction of VAT applied to this compensation on the grounds that its sole purpose was to redress the loss suffered by the lessee, which was caused by early termination of the commercial lease.

The Council of State, hearing the case, ruled that vacating the premises as the result of early termination of the lease must be seen as a clearly isolated service, which was reflected by the opportunity offered to the landlord to conclude a new lease under more favourable market conditions.

The direct link therefore appears obvious where the landlord needs to have early and unrestricted use of the property, where the latter’s aim is to relet the property or to carry out work on it, and where termination takes place, or not, on expiry of the three-year term (contrary to the position that may have been adopted by the authorities in the past). The hope is that this ruling will provide legal certainty for operators, although there is still some uncertainty in this area.