MEO, a Portuguese telecommunications company providing telecommunications, internet access, television and multimedia services for monthly subscription fees was entitled under its customer contracts upon deactivation of service to compensation corresponding to the amount of the agreed monthly subscription fee multiplied by the difference between the duration of the minimum commitment period provided for in the contract and the number of months during which the service was provided. Article 2(1)(c) of the VAT Directive provided that “the supply of services for consideration within the territory of a Member State by a taxable person acting as such” is subject to VAT. Article 73 of the VAT Directive provided:
In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.
In finding that the early-termination amounts so received by MEO were “for consideration” and, thus, subject to VAT, the Court stated (at paras. 39-40, 45):
[A] supply of services is carried out ‘for consideration’, within the meaning of that provision, only if there is a legal relationship between the provider of the service and the recipient pursuant to which there is reciprocal performance, the remuneration received by the provider of the service constituting the actual consideration for the service supplied to the recipient … . This is the case if there is a direct link between the service supplied and the consideration received … .
[T]he Court has already held, as regards the sale of air tickets that passengers have not used and for which they could not obtain repayment, that the consideration for the price paid at the time of the signing of a contract for the supply of a service is formed by the right derived by the customer to benefit from the fulfilment of the obligations arising from the contract, irrespective of whether the customer uses this right. Thus, that supply is made by the supplier of services when it places the customer in a position to benefit from the supply, so that the existence of the abovementioned direct link is not affected by the fact that the customer does not avail himself of that right … .
[I]t must be held that the consideration for the amount paid by the customer to MEO is constituted by the customer’s right to benefit from the fulfilment, by MEO, of the obligations under the services contract, even if the customer does not wish to avail himself or cannot avail himself of that right for a reason attributable to him.