Value added taxability of a default fee

The extent to which a contingency fee due after termination of a contract is subject to VAT depends on the contractual agreements.

If a cancellation fee is incurred when a contract is terminated, the question arises as to whether this is VAT-exempt compensation or a taxable payment for a service rendered in return. The German Federal Fiscal Court (Bundesfinanzhof) has ruled that a contingency fee is only taxable remuneration to the extent that it is attributable to parts of the service already rendered. The extent to which this is the case depends on what the contracting parties actually agreed or intended to agree. The tax aspects should therefore always be taken into account when formulating the contract.