France - Administrative guidelines released on VAT treatment of compensation payments

The French tax authorities updated their Administrative Guidelines on 28 December 2022 to consolidate their position on the VAT treatment of compensation payments and provide several clarifications. The Administrative Guidelines are binding on the tax authorities.

Compensation payments are typically made where an agreement is terminated early. In the past, such payments were considered to fall outside the scope of VAT because they are not consideration for a supply of goods or services (unless the agreement provided otherwise). However, many countries - including France - are now adopting the position that compensation payments may be subject to VAT (for prior coverage of this issue in the UK, see the article in the October 2022 issue of Indirect Tax News).

Compensation paid for early termination of a contract

The French tax authorities have adopted relevant decisions of the Court of Justice of the European Union (CJEU) and clarified that the following compensation payments are taxable for VAT purposes:

  • Predetermined amounts received by an economic operator for early termination of a services contract, where the contract includes a minimum commitment period that is an integral part of the total price paid for the services.
  • Compensation paid to a lessor for the early termination of a finance lease for a reason attributable to the lessee, where the compensation corresponds to the amount the operator would have received during the remainder of the lease period, and this amount is an integral part of the total amount the lessee has undertaken to pay for the performance of the lease obligations.

“No-show" service

Considering the increasing number of disputes relating to amounts retained by hotels where customers fail to show up for their reservations ("no show" services), the French tax authorities have adopted the CJEU decisions in the Eugénie-les-Bains and Air France-KLM and drawn their own conclusions.

The CJEU held in Eugénie-les-Bains that where a customer pays a deposit to reserve a hotel room and the hotel retains that amount if the guest fails to show up does not attract VAT because the hotel is not providing any “service” to the guest. The deposit in this case functions as compensation to the hotel for the “loss” incurred when the customer does not honour their reservation. However, in Air France-KLM, the CJEU subsequently reached the opposite conclusion, ruling that VAT is due on the sale of an airline ticket where the passenger does not use the ticket and the ticket is non-refundable.

In the Administrative Guidelines, which adopt the rationale in Eugénie-les-Bains, the French tax authorities take the position that if the sole purpose of an amount is to compensate for a loss, that amount is not subject to VAT. For example, where a deposit is in the form of lump-sum compensation for the termination of an agreement and compensates the service provider for the loss suffered, the payment is not directly linked to any service rendered for consideration and, therefore, is not subject to VAT. This position likely could apply to other sectors.

The guidelines also provide that if the amount retained by the service provider is equal to the price to be paid for the service or received in the absence of a loss, that amount is subject to VAT, thus confirming the CJEU’s decision in Air France-KLM by providing that the price of unused and non-refundable reserved capacity is subject to VAT. The guidelines make a direct reference to language in the decision: "the consideration for the price paid when the ticket was purchased consists of the passenger’s right to benefit from the performance of obligations arising from the transport contract, regardless of whether the passenger exercises that right, since the airline company fulfils the service by enabling the passenger to benefit from those services.

The tax authorities specify that this rule applies to reservations for hotel rooms, activities, travel (including in the context of the application of the margin scheme), and to purchases of multiple-ticket cards and cinema tickets. However, the price of unused and non-refundable reserved capacity remains VAT-taxable regardless of:

  • Whether the customer bears only part of the price of the reserved and unused capacity (e.g., where the customer reserved a room for several nights, but the hotel retains only the amount equal to the price of the first night);
  • The customer’s method of payment (amount paid in advance and not reimbursed or amount paid after cancellation); and
  • Whether the customer formally cancels the reservation before the reservation period commences or simply does not show up on the reservation date without giving advance notice to the provider.

Interestingly, the Administrative Court of Appeal of Paris recently issued two decisions on the VAT treatment of “no shows" that draw on the Air France-KLM and Eugénie-les Bains decisions. The court found that:

  • The amount corresponding to the full price of the service that is retained by a hotel following the guest's default (i.e., no show) does not constitute a deposit because:
    • The payment for a service that ultimately is not used cannot be considered compensation for a loss when the service provider is able to rent the room to another party; and
    • The hotel’s retention of the full amount of the payment prevents the payment from being regarded as partial and lump-sum compensation if the guest defaults after the deadline for cancelling the reservation.

The amount retained is part of the economic equilibrium of the contract because it is fixed according to the characteristics of the room and the duration of the reservation.

  • The amount corresponding to part of the price of the service and retained by the hotel represents remuneration for the service provided, i.e., the guest’s right to use the room booked, which is an integral part of the hotel service, regardless of whether the guest exercises that right.

    Thus, even though it is not a "prepayment,” the amount paid constitutes the actual consideration for an identifiable service, the elements of which (i.e., the service to be provided and the amount charged to the guest) were determined at the time the contract was concluded. The amount therefore represents the remuneration for the transaction that is the subject of the contract and must be subject to VAT.

    The retained amount is not to be regarded as a deposit to the extent it (i) is determined based on the features of the reservation and not on a flat-rate basis; (ii) is the direct counterpart of a service; and (iii) does not compensate for a loss because the service provider is able to rent the room to a third party.


The trend—in both case law and France’s Administrative Guidelines—is to extend the scope of application of VAT to amounts retained by establishments in the event of a no-show. The scope of the Eugénie-les-Bains decision is more limited, while the criteria used by the tax administration and the judge to decide on the taxation of the amounts seem to be growing more numerous.

To determine whether an amount retained is compensation for a loss or remuneration for a service (and therefore taxable for VAT), it is necessary to analyze the general terms and conditions of sale, the methods used to determine the amounts retained by the establishment and to verify whether the client and/or the service provider has a right of withdrawal.

Andréa Lopes
David Hirsch
Guillaume Deiber
BDO in France