The judgement of the European Court of Justice of 28 November 2024 (Case C-622/23) marks a paradigm shift. Since 2024, the contractor’s termination compensation has no longer been a net amount, but a gross amount. VAT is payable on the part of the service that has not been performed. At least in Europe, this should be the case in accordance with Article 2(1)(c) of Directive 2006/112/EC (the VAT Directive).
In Germany, however, this may give rise to doubts. This is because the most recent authoritative case law of the Federal Fiscal Court (BFH) (judgement of 26 August 2021 – V R 13/19) and the Federal Court of Justice (BGH) (judgement by default of 22 November 2007 – VII ZR 83/05) states that no VAT is payable on the part of the service that has not been performed. When advising on a terminated construction contract, the question therefore arises as to whether the termination payment plus VAT should be claimed in court or whether – to avoid a 19 per cent risk of losing the case – it might be better to waive the claim for VAT where appropriate.
For architects and building contractors, this question arises as early as the time of the final invoice. In the context of legal advice, it arises at the latest when the statement of claim is being drafted. Considerable legal uncertainty would arise should the tax authorities decide not to apply the ECJ’s ruling for the time being. Until further notice, there are no new working instructions for the German tax authorities, meaning that they are, in essence, continuing to adhere to working instructions that are now contrary to European law, based on the decisions of the Federal Fiscal Court (BFH) and the Federal Court of Justice (BGH) from 2007 and 2021. The most prominent instruction is the Federal Ministry of Finance (BMF) letter dated 27 January 2023 – III C 2 – S 7270/20/10002 :001 – also known as the guidance note on VAT in the construction industry (USt M 2). To put it bluntly, the ECJ is, for the moment, at a loss here due to German administrative practice. Looking ahead, it remains to be seen how long this situation will persist. There does not yet appear to be any move away from the aforementioned BMF circular.
The resulting legal uncertainty and the complex interplay between the calculation and settlement of termination payments, the assertion of claims and subsequent VAT assessments can lead to unpleasant tax surprises – particularly if the tax authorities come to their senses and apply the relevant European legislation to the construction sector in future.
The first judgements reflecting this paradigm shift have already been handed down. Particularly compelling is the decision of the Kammergericht of 13 May 2025 (Case No. 21 U 8/25). The judgement of the Koblenz Regional Court of 11 July 2025 (Case No. 8 O 119/23) also provides initial guidance on the application of the ECJ ruling through an interpretation of the concept of a claim for remuneration within the meaning of Section 288(2) of the German Civil Code (BGB) that is consistent with European law. However, the main issue here is whether interest on the termination payment should be calculated at 5 or 9 percentage points above the base rate.
The pressing questions are: How is the termination payment calculated, and where should the relevant amount be stated? Is it advisable to bring a claim for the gross amount, or does it make more sense to claim the net amount?
We have a clear answer and recommendation for our clients: gross rather than net! Regardless of how and where the termination payment is shown on the final invoice, this shift in approach does not, in principle, require confirmation by the Federal Court of Justice (BGH). It cannot be ruled out that the court may still need to be persuaded of this with the right arguments. Even if this proves unsuccessful in an individual case, there are procedural means and ways to avoid potential damage and to secure the gross amount in the event of a possible change of heart by the tax office at a later date.
Conclusion
With its judgement of 28 November 2024, the ECJ has ushered in a clear paradigm shift: termination compensation is subject to VAT – including in respect of the part of the service that has not been provided. At the same time, the continuing discrepancy between CJEU case law and German administrative practice (Federal Ministry of Finance letter of 27 January 2023) requires careful consideration of the course of action to be taken. Until the tax authorities issue new guidance, those affected should carefully weigh up both the tax and procedural risks.
Key points in brief
- The severance payment is a gross amount
- The ECJ case law does not require confirmation by the Federal Court of Justice
- It remains to be seen when the tax authorities will respond with a clarifying letter from the Federal Ministry of Finance (BMF).
