The European Court of Justice (“ECJ”) has recently published its decision in the case of Air France -KLM and Hop!-Brit Air v. Ministère des Finances et des Comptes publics (C-250/14 and C-289/14).
The resulting decision means that VAT must be charged on unused air tickets that are not refundable.
Air France-KLM is a French air transport company. Within French territory, flights operated by Air France-KLM are subject to VAT at a reduced rate of 5.5 percent. As from 1999, Air France decided to no longer pay over to the French tax authorities VAT on the sale of tickets that passengers had not used and for which a refund could not be claimed. However, the French Tax Authorities considered that VAT was payable on those tickets, and accordingly raised assessments to Air France-KLM of additional VAT amounting to EUR4m covering a period of three years.
In addition, a subsidiary of Air France, Brit Air (which became Hop! Brit Air in 2013), carried out air passenger transport services in the context of a franchise agreement with Air France-KLM. The latter was responsible for marketing and ticket management on the routes operated as a franchise by Brit Air.
Air France-KLM received the price of the tickets before paying it on to Brit Air with respect to each passenger transported. Where tickets were not used by passengers, Air France-KLM paid Brit Air an annual flat-rate compensation calculated at 2 percent of the annual turnover (including VAT) from the routes operated as a franchise. Brit Air did not account for VAT on this sum so it also received a VAT assessment from the French Tax Authority.
The French Conseil d’État (Council of State) was unsure as to whether the unused transport tickets may be subject to VAT and so put this question forward to be answered by the ECJ.
In its judgment, the ECJ answered that question in the affirmative. The Court noted that VAT is payable where, firstly, the sum paid by the customer to the airline company is directly linked with a service (in this case air transport) and, secondly that the service is performed.
However, the Court stated that the consideration for the price of the ticket does not depend on the physical presence of the passenger at boarding, but that it consists of the passenger’s right to benefit from the performance of the transport service, regardless of whether the passenger exercises that right. In other words, for VAT to be payable, it is sufficient that the airline company carries out the flight enabling the passenger to benefit from the transport service. In that regard, the Court stated that VAT becomes chargeable on receipt of payment of the ticket price.
The ECJ added that, in the event that a third party (in the present case, Air France-KLM) sells the ticket of an airline company (i.e. to Brit Air) in the context of a franchise agreement and pays that company a lump sum in respect of tickets issued but no longer valid, VAT is also applicable to that lump sum.
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