Is the Reimbursement of Costs for Legal Representation by an Attorney Subject to VAT?

A Bulgarian company, T. P. T. (hereinafter as ‘the Claimant’), brought civil proceedings against its business partner, Financial Bulgaria (hereinafter as ‘the Defendant’), seeking a declaration of nullity of an agreement. For the purpose of legal representation before the court, the Claimant concluded an agreement with an attorney (hereinafter as ‘the Attorney’), who provided the representation free of charge pursuant to the Bulgarian Bar Act. In the event of success, the Attorney was entitled to a reimbursement of legal costs, which would be payable by the opposing party. The amount of such costs is determined precisely under Bulgarian legislation. The Attorney was successful in representing the Claimant, and the Bulgarian court therefore awarded him with reimbursement of legal costs, payable by the Defendant. The subject of the dispute was whether the reimbursement of costs awarded to the Attorney constitutes consideration for a taxable supply of services. 

The Court of Justice of the European Union (hereinafter as ‘the CJEU’) reiterated that a service is subject to VAT only where two cumulative conditions are met: (i) a legal relationship exists between the provider and the recipient of the supply, within which reciprocal performance is exchanged; (ii) the remuneration received by the provider constitutes real consideration for the service actually supplied. 

Relying on prior case law, the CJEU described situations in which such a direct link is considered broken — notably where the remuneration is provided on a random basis, so that its amount cannot, or can only with difficulty, be determined, or where the remuneration is uncertain as to its establishment. 

In the case at hand, the CJEU considered the existence of a contractual relationship undisputed, as a contract existed between the Claimant and the Attorney. The second condition was also met, since the amount of remuneration was determined under Bulgarian law (corresponding to the statutory minimum attorney’s fee). 

The CJEU therefore concluded that the reimbursement of costs awarded to the Attorney constitutes a taxable supply of services. The fact that the service was provided free of charge to the Claimant under the contract, and that the Attorney’s remuneration depended on the outcome of the case, did not constitute an obstacle to taxation. The CJEU drew an analogy with situations where consideration is provided by a third party: it is not necessary for the payment to be made directly by the recipient of the service. For practical application, it is now clear that it is not essential for the specific consideration to be defined directly in the contract concluded between the supplier and the recipient of the supply. However, the question remains unresolved whether the consideration — which in this case was defined by law — may similarly be determined by another private‑law or public‑law agreement.

Authors:

Radka Dubnová, Tax Department Manager

Eliška Kubátová, Senior Consultant, Tax Department