Paradigm shift in cancellation fees under building law

The ECJ and the Berlin Court of Appeal clarify that remuneration for services not rendered is also subject to VAT.

Introduction

The premature cancellation of construction contracts by the customer and the associated remuneration claims of the contractor regularly raise complex invoicing issues. While previously only the remuneration for services actually rendered was deemed to be subject to VAT, the European Court of Justice ruled in its judgment of 28 November 2024 (Case C-622/23) on an Austrian case that the remuneration for services not rendered is also subject to VAT, provided that the contractor had started work and was ready for completion. The Berlin Court of Appeal has now consistently applied this ECJ case law to national law in a ruling dated 13 May 2025 (case no. 21 U 8/25).

Facts of the case and previous legal situation

The decision of both the ECJ and the Court of Appeal centred on a classic case of premature contract termination: A building contractor had started to carry out the agreed services, but the client cancelled the contract before the work had been completed. 

If a building contract is freely cancelled by the client before the work has been completed, the contractor can demand the agreed total remuneration less the expenses saved and other income in accordance with Section 648 sentence 2 BGB. In the case on which the ECJ ruling is based, the contractor demanded payment of precisely this claim, colloquially referred to as the "large cancellation fee". 

While the civil law claim is clearly regulated by German law on contracts for work and services, the question of whether the invoiced amount is subject to VAT depends on whether the remuneration component for the remaining services not rendered is VATable remuneration or non-VATable compensation.

Until now, it has been the established case law of the Federal Court of Justice and the Federal Fiscal Court, as well as the opinion of the tax authorities, that only the remuneration for services actually rendered is subject to VAT and VAT. This is because only the work performed constitutes consideration for the remuneration to be paid, which qualifies it as taxable remuneration. In the final invoice after cancellation, a distinction therefore always had to be made between services rendered (invoicing with VAT shown) and services not rendered (invoicing without VAT). In practice, this regularly leads to complex demarcation issues and uncertainties.

Decisions by the ECJ and the Court of Appeal

The ECJ has now clarified that the amount that a customer owes the contractor even if the work is not carried out in full is to be regarded as consideration for a supply within the meaning of the VAT Directive if

1. the contractor was prepared to provide the service and
2. was prevented from doing so by circumstances on the part of the customer.

According to the ECJ, the taxable supply of the contractor therefore already consists of the fact that the contractor enables the customer to call off the contractually owed service. In contrast, German case law and tax authorities have so far assumed that premature termination creates a new object of performance (unfinished work) and that the remuneration for this can only be subject to VAT if there is a consumable benefit.

Around six months after the ECJ judgement, the Berlin Court of Appeal applied these guidelines to German law. The previous national case law and administrative practice has thus been rejected.

Effects on practice

Early cancellations are not uncommon in construction practice, for example in the event of financing bottlenecks on the part of the client, changes to plans or unforeseen land problems. In such cases, the contractor is often put on hold - the work has begun, the construction project is unfinished and the rather complex settlement of the cancellation fee becomes necessary in order to compensate for liquidity bottlenecks.

Implications for construction law
Settlement after cancellation remains challenging even after these court decisions. The KG emphasises that the client's information and control interests must also be safeguarded against the background of the new case law. A clear delimitation of the services rendered and not rendered by the contractor continues to be a prerequisite for a verifiable final invoice. It is therefore advisable to systematically document the expense account right from the start of execution. Against this background, the court rulings have hardly any implications for construction law.

Implications for VAT law
The previous German case law of the Federal Court of Justice and the Federal Fiscal Court is likely to be invalidated by the judgement of the ECJ for cases under Section 648 sentence 2 BGB. This has been confirmed by the Court of Appeal. In future, VAT should therefore be levied on the entire settlement amount - i.e. including the part that was considered compensation in the past. The basis of assessment is the contractually agreed (full) remuneration less the expenses actually saved after cancellation and other income. 
However, it is still unclear when this ECJ ruling will apply in Germany. The corresponding passage in the VAT Application Decree (sec. 1.3 para. 5, sec. 3.9 para. 2 UStAE) is still unchanged and is generally binding for the tax authorities. However, taxable persons can also refer directly to the ECJ case law if this is more favourable for them. For customers who are entitled to deduct input VAT and, in particular, in cases of reverse charge (Section 13b (2) No. 4, (5) UStG), the new judgement is not likely to be more advantageous, but it is also not economically significant. However, for customers who cannot claim an input tax deduction, the ECJ ruling will lead to an actual additional burden, as the previously non-taxable compensation will become taxable remuneration. 
An update of the administrative instructions for the tax authorities can be expected. Construction companies should therefore already be preparing to adapt their invoicing and accounting processes. In disputed cases, the right to claim the VAT portion should be reserved and the limitation period under civil law for remuneration claims should be kept in mind.