On December 23, 2015 the Court of Justice of the European Union (CJEU) rendered judgment in the joined French Air France-KLM and Hop!-Brit Air SAS (case nos. C-250/14 and C-289/14, hereinafter: “Air France-KLM”). It ruled that advance payments may be subject to VAT in the case of ‘no shows’.
The taxpayers are airline companies that offer both domestic and international flights to passengers. When an airline ticket is purchased, passengers pay the full price of the ticket (including VAT) in advance. The airline companies took the position that no VAT was payable at the time the passenger did not use their ticket, because in that situation no transport service had been provided to the passenger. The French Conseil d’État requested a preliminary ruling from the CJEU on whether an airline ticket can be equated with the effective performance of a transport service and therefore VAT is payable on the ticket prices paid by passengers that do not show up.
Analysis of CJEU judgment
The CJEU has now ruled that airline tickets issued by an airline company are subject to VAT when the passengers do not use the issued tickets and cannot obtain a refund of the price of the ticket. The CJEU has thus determined that advance payments may be subject to VAT in the case of ‘no shows’. This is because the airline ticket is a confirmation by the airline company that a seat on the plane will be reserved for the passenger. The passenger is therefore entitled to make use of the transport service. The CJEU also ruled that VAT is chargeable at the time the airline companies receive the purchase price of the airline ticket.
In a previous judgment, the CJEU ruled that a fee in the case of a cancellation is not subject to VAT, but qualifies as non-taxable compensation (Société Thermale d'Eugénie-les-Bains, July 18, 2007, C-277/05, hereinafter: “CJEU Sociète Thermale”). Although the facts in both cases are similar from an economic perspective, we believe that the contractual conditions applied in both judgments differ to such an extent that this can lead to a different VAT treatment. Based on CJEU Sociète Thermale, a cancellation fee can, in certain situations, still continue to qualify as non-taxable compensation for VAT purposes.
This does not alter the fact that the decision by the CJEU in the Air France-KLM case may affect businesses in various sectors, such as hotels, restaurants, tour operators, theaters, cinemas, museums and event agencies. The CJEU judgment also especially impacts the telecommunications sector, given that specific rules apply here to unused balances. We expect the Dutch tax authorities to start paying particular attention to the VAT implications of cancellations. We recommend that in situations of ‘no shows’ or cancellations, the underlying contract and general terms and conditions are carefully scrutinized.
The tax advisors of Meijburg & Co’s Indirect Tax Group would be pleased to help you identify the possible impact of this judgment on your business. Feel free to contact one of them or your regular contact at Meijburg & Co for more information.