CJEU rules on VAT for unused passenger tickets: A judgment with hidden consumer-law implications?

The Court of Justice of the EU (CJEU) judged recently that airlines have to pay Value Added Tax (VAT) for unused, non-refundable airline tickets. This might have implications on the right of passengers to claim also VAT refund in case of unused (partly) refundable tickets.

The judgment concerned two joined cases:

(a) case C-250/14, in which French tax authorities obliged Air France (currently Air France-KLM) to pay additional VAT for the period from 1 April 2000 until 31 March 2003, amounting to EUR 4 066 607, together with default interest amounting to EUR 1 226 584, which related to the amounts Air France had received for non-refundable passenger tickets, which had not been used by their holders;

(b) case C-289/14, in which French tax authorities demanded VAT for the lump sum paid annually by Brit Air (currently Hop!-Brit Air SAS) to Air France, for unused non-refundable tickets of Air France that Brit Air had sold in the context of a franchise agreement concluded between them. This sum was 2% of the annual turnover from the routes operated as franchise, including VAT.

French authorities based their decision on the provisions of Directive 77/388/EEC, as amended, which was applicable at that time (this Directive has been repealed by Directive 2006/112/EC, yet many of its provisions have been included in the new Directive). The above cases ended before the French Supreme Court for administrative issues (Conseil d’ Etat), which referred to the CJEU for a preliminary ruling.

The airlines claimed that these sums were actually compensation paid by passengers for their non-show and not remuneration for services of air carriage. Therefore, they were not subject to VAT.

The CJEU clarified that, according to Directive 77/388/EEC, VAT is due for services, if the amount paid by the passenger is directly linked to an identifiable service and if the service is performed. It suffices that the airline has made available the service of the air carriage to the passenger, even if the passenger has not used the service.

Furthermore, the VAT paid by the passenger becomes chargeable on receipt of payment of the ticket price, whether by the airline itself, by a third party acting in its name and on its behalf, or by a third party acting in its own name but on behalf of the airline. Therefore, if a third party sells tickets on behalf of the airline in the context of a franchise agreement and pays the airline a lump sum for the tickets issued and no longer valid, that sum is taxable as consideration for those tickets.

It is noteworthy, that the CJEU rejected the airlines’ argument that the sum received as VAT was part of compensation that the passenger provided to the airline for its losses resulting from the non-show. The Court observed that, since the airlines had retained the full amount of the ticket, they had sustained no damage.

Consequently, airlines have to pay VAT for unused, non-refundable tickets, regardless of how they received the price of the ticket.

A very interesting issue are the implications of this judgment for refundable tickets. Does the judgment imply that airlines are not obliged to pay VAT for the refundable part of the ticket? Is the airline entitled to withhold the VAT amount paid by the passenger as compensation for its loss? Is the VAT also refundable alongside with the refundable part of the ticket? What would be the exact requirements for such right from the perspective of the applicable EU rules on airline pricing (Regulation (EC) No 1008/2008), unfair commercial practices against consumers (Directive 2005/29/EC) and unfair contractual terms in consumer contracts (Directive 93/13/EEC)? The answers to the above questions are highly equivocal and would perhaps constitute the subject of another question to the CJEU for a preliminary ruling.