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VAT
VAT on Pro Bono Services by a Lawyer
If a lawyer initially provides services pro bono, i.e. free of charge, it is assumed that no VAT is due. This is not the case where the opposing party, because of its loss, must cover the lawyer’s costs.
In a case decided by the Court of Justice of the European Union (CJEU, EuGH), a lawyer initially represented his client free of charge, i.e. pro bono. As the client won the case, the losing opposing side was obliged to pay a statutory minimum fee (as prescribed by Bulgarian law). Because of this payment obligation, the question arose whether a VAT‑liable supply also exists when the client himself did not have to pay for the legal services. The CJEU answered in the affirmative.
The judgment underlines that the cost reimbursement in civil proceedings is not damages but consideration for a VAT‑liable supply. A counter‑party that may be engaged in entrepreneurial activity, however, is entitled to no input tax deduction for the amount reimbursed to the lawyer, because there is no contractual relationship and therefore no exchange of services between it and the lawyer. The VAT relationship exists solely between the lawyer and his successful client.
The CJEU stated:
The judgment underlines that the cost reimbursement in civil proceedings is not damages but consideration for a VAT‑liable supply. A counter‑party that may be engaged in entrepreneurial activity, however, is entitled to no input tax deduction for the amount reimbursed to the lawyer, because there is no contractual relationship and therefore no exchange of services between it and the lawyer. The VAT relationship exists solely between the lawyer and his successful client.
The CJEU stated:
- For VAT liability it is irrelevant whether the client settles the invoice himself or whether the money comes from a third party (as in the present case from the losing opposing side).
- Once a direct link exists between the supplied service (the legal representation) and a payment (the court‑awarded fee), a taxable transaction arises. This direct link requires a legal relationship between the supplier and the recipient within which reciprocal services are exchanged, the received remuneration representing the true consideration for the service rendered. In the present case the remuneration stemmed from the statutory cost‑reimbursement rule.
- The initial uncertainty as to whether a payment would actually be made, because the client’s success was not guaranteed, does not preclude a ultimately remunerated legal service arising from a cost‑reimbursement.