The tax treatment of penalties for the early termination of service agreements has been repeatedly analysed by the Spanish Directorate-General for Taxation (DGT) and by the case law of the Court of Justice of the European Union (CJEU). The recent Binding Consultation V0757-25, dated April 28th, 2025, issued by the DGT, addresses the VAT treatment of the amount that a homeowners’ association was obligated to pay its gas supplier as a penalty for breaching the minimum commitment period agreed upon in the supply agreement. Based on the DGT’s analysis, the question arises as to whether this criterion can be extrapolated to other areas, such as, for example, property leases.
In the case examined in the Binding Consultation, a homeowners’ association unilaterally and prematurely terminated its gas supply agreement with a supplier, and thus was obligated to pay the supplier an amount as a penalty tied to the breach of the minimum commitment period.
Until recently, the DGT had held that this type of compensation for early termination of a contract —unless it actually constituted consideration— did not amount to a transaction subject to VAT, but was instead a mere compensation for damages. This was the position of the administrative doctrine, relying on several CJEU judgments issued before 2020 (Cases C-215/94, Mohr, and C-384/95, Landboden).
However, the DGT indicates that this criterion has changed following successive CJEU judgments, particularly the judgment of June 11th, 2020 (Case C-43/19, Vodafone Portugal). That judgment states that amounts received by an economic operator in the event of early termination of a service agreement, when the contract provides for a minimum commitment period and a more advantageous condition for the customer, constitute remuneration for a service subject to VAT. These amounts are, in essence, of the same nature and purpose as the monthly fees that would have been payable if the contract had run its full term, guaranteeing the provider a minimum remuneration in exchange for making the agreed good or service available to the customer.
Likewise, the DGT cites the CJEU judgment of November 28th, 2024 (Case C-622/23, RHTB), which extends this criterion to construction contracts and to penalties covering loss of profit under the same circumstances.
Therefore, the conclusion reached is that penalties for early termination provided for in service agreements subject to minimum commitment periods and advantageous conditions, when the amount of the penalty equals what the provider would have received had early termination not occurred, form part of the VAT taxable base.
This raises the question: Is this criterion applicable to early termination of a property lease when the tenant must pay a penalty for that reason?
A property lease is also a supply of services for VAT purposes when the landlord is a VAT taxpayer; periodic rents are subject to VAT and accrue in each period.
Applying the criteria derived from the consultation, if the lease contract includes a minimum-stay clause and a penalty for early termination, the amount paid by the tenant to the landlord as a penalty likewise constitutes remuneration for making the property available during that period, ensuring the landlord receives a minimum remuneration for the contracted services.
The penalty, in these terms, forms part of the total consideration agreed in the contract. Thus, as the DGT has ruled for supply agreements and as the CJEU has emphasized in the cited cases, the penalty amount paid by the tenant would be included in the VAT taxable base, with the landlord required to charge VAT and report it as taxable income.
In light of all the above, it may be concluded that the penalty for early termination paid by a tenant of real estate property constitutes remuneration subject to VAT, unless it can be demonstrated that its nature is purely compensatory and unrelated to the remuneration of services actually provided—an exception which, according to the ruling analysed, will be interpreted restrictively. As a recommendation, it is particularly important to set out in detail in the contract the origin and the components of any penalty to avoid tax uncertainty.
Joan Lluís Rubio
Vilá Abogados
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12th of December 2025
