Value added tax
on
damages.
Value added tax
on
damages.
from
Imagine a hotel plays music without a license. The collecting society then demands three times the normal license fee. Does VAT also have to be paid on this amount, and if so, on everything or only on the normal license fee?
How did the legal dispute come about?
A Romanian bed and breakfast had made music and audiovisual content available to its guests without having obtained the necessary license from Credidam, the competent Romanian collecting society. Under Romanian law, three times the normal license fee is due in such a case. Credidam demanded around EUR 845 including VAT for the period from October 2019 to December 2022 and was of the opinion that the entire penalty fee was subject to VAT. The pension defended itself and the Bucharest Court of Appeal referred the question of whether and to what extent VAT was due to the European Court of Justice.
What did the court decide?
The EGC has ruled on this with Judgment of 11.02.2026 – Ref. T-643/24 decided as follows:
Firstly, owners of related rights provide a “service for consideration” within the meaning of the VAT Directive if their works are used without a license. This applies even if they cannot prevent the use and their remuneration is determined solely by national law. Secondly, not only the normal license amount, but the entire penalty remuneration, including the surcharge, is subject to VAT.
The court based its decision on the case law of the European Court of Justice on parking fees in the event of infringements and on secret electricity consumption. Accordingly, the principle of fiscal neutrality prohibits a blanket differentiation between permitted and unauthorized services. The surcharge is the direct consequence of use without a license and therefore part of the consideration for the service.
VAT is payable on the total remuneration due to holders of related rights for this service, including the part of this remuneration that exceeds the remuneration that the user would have had to pay for a license.
What does this mean for current practice: compensation and VAT?
In Germany and large parts of Europe, it has long been the case that compensation for damages does not constitute remuneration for a service and is therefore not subject to VAT. The Federal Fiscal Court has confirmed this for German law in its established case law. The ECJ ruling does not fundamentally call this practice into question, but significantly sharpens the dividing line.
The key lies in the question of whether there is a direct connection between the payment and a specific service. The court did not see the penalty payment for unauthorized use of a work as compensation for damages in the traditional sense, but rather as consideration for the service actually used, which was merely used without prior permission. In this reading, the surcharge is not a penalty, but the price for precisely this type of unauthorized use, which was set as such by national law from the outset.
Although this distinction is old, the ruling clarifies it. Anyone who makes use of a service and pays for it subsequently is paying a fee for a service. On the other hand, anyone who does not receive a service at all but pays for damages pays compensation for which no VAT is due. The gray area is where the two elements come together.
Is the judgment transferable to other areas of law?
In doing so, the ECJ expressly relies on older ECJ rulings on parking fees for unauthorized parking and on illegally tapped electricity. The court therefore considers this principle to be generally applicable and not a special rule for copyright law. This raises new questions in several areas.
In the field of industrial property rights, for example, trademark owners often demand a license analogy for unauthorized trademark use, i.e. the amount that a proper licensee would have paid, often supplemented by a surcharge for the illegality. If this amount is to be regarded as remuneration for the actual use of the trademark, the logic of the ECJ ruling could also apply here. The situation is similar in patent law. The act of use takes place, even if it occurs without a license, and the remuneration is based on the value of this use.
It remains to be seen whether the ruling will call into question the established practice that no VAT is payable on damages. The ruling has merely set out the legal framework. Whether a specific situation falls within this framework must be examined by the respective national court. Furthermore, the ruling only applies directly to the VAT Directive and its interpretation, not automatically to national VAT law.
Conclusion
The classic distinction between compensation for damages and payment for services loses its clarity where a service has actually been used and the payment represents its equivalent value – even if the use was unlawful.
For companies and rights holders, this means that the tax character of a payment may in future have to be assessed even more carefully according to the actual economic substance of the underlying transaction.
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