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Compensation for early termination of the rental agreement

The unstable economic situation, and the ensuing difficult situation on the rental market, forces landlords to make various concessions.
Agnieszka Niedzielska
Tax Compliance Manager, Tax Advisor

One of these concessions is the possibility of an early termination of the rental agreement, which often involves an additional fee charged by the landlord, to be paid by the tenant. In these instances, the decisive role is the landlord’s consent to an early termination of the rental agreement without adherence to the prescribed notice period.

Termination of the rental agreement

By giving such consent, a landlord carries out additional service to the renter, who is subject to VAT. This is a paid service where the compensation represents remuneration for a specific action of the landlord.The condition for the existence of a relationship between the payment of receivables and the receipt of a consideration is met - it is a necessary condition to recognize that the payment of such an amount is subject to VAT.

Expressing consent to the early termination of the rental agreement, through the concluded contractual conditions, or the signing of an appropriate agreement between the parties and payment of a specific amount by the tenant, ends the rental relationship.

VAT and termination of the agreement

According to the VAT laws, the provision of services is understood as any act for the benefit of a natural person, a legal person, or a non-corporate organizational unit, which does not constitute a supply of goods, including an obligation to refrain from an activity or to tolerate an activity or situation (Art. 8(1)(2) of the VAT law).

Therefore, the concept of providing services has a very wide scope. It includes not only specific actions, but also a commitment to refrain from performing an action or situation. Thus, the concept of service is understood as any behavior, which may include an act of doing something, as well as an omission, consisting of not doing something or tolerating something.

Thus, the fee, which is a form of compensation paid by the renter, cannot be treated as compensation for the landlord's lost profits. After all, the landlord does not suffer losses due to non-performance, or improper performance of an obligation. Such fees arise from a legal relationship, such as a rental agreement, and are subject to VAT on the same basis as rental services. Therefore, landlords should document the amount received as they would document a rental service (Judgment of the WSA of 17.10.214, III SA/Wa 1230/14).

Tax rulings

The Director of the National Tax Information, in the issued tax rulings, unequivocally recognizes that in the event of early termination of the agreement by mutual consent of the parties, we are dealing with the provision of a service within the meaning of VAT Act. Consequently, the fee charged constitutes remuneration for the provision of the service and, as such, should be documented by an invoice. Confirmation of the cited thesis should be sought in, among others: tax ruling of October 11, 2022, mark: 0113-KDIPT1-1.4012.508.2022.4.RG, tax ruling of September 23, 2021, sign: 0112-KDIL3.4012.264.2021.1.AW, tax ruling of September 3, 2021, sign: 0111-KDIB3-2.4012.409.2021.4.SR, tax ruling of October 31, 2019, sign: 0114-KDIP1-2.4012.580.2019.1.MC, or in the judgments of the Supreme Administrative Court, among others, of March 22, 2017, ref. no. I FSK 1283/15, in the justification of which the Court indicates, among other things, that " (...) the Court of First Instance correctly held that the payment by the lessee, on the basis of the agreement concluded with the lessor, of the amount specified in this agreement for early termination of the rental agreement, constitutes remuneration in exchange for the provision of services within the meaning of this provision and is therefore subject to VAT. This is the nature of the payment, called "compensation" by the parties to the rental agreement, the administrative courts have previously pointed out. (...) an agreement to earlier termination of the contract in exchange for payment of a certain amount should be evaluated as a commitment to refrain from pursuing from the renter the effects of the lease agreement that united the parties, and such behavior falls within the concept of service within the meaning of Article 8 (1) of the VAT Act (...)."

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