1    Background

Damages and VAT have different objectives: damages are intended to restore the original state (restitution in kind) or, if this is not possible, at least to compensate for the disadvantage suffered (compensation). VAT, on the other hand, is due if a remuneration is paid for a supply. In cases of damages, both objectives coincide, raising the general question of whether and to what extent the disadvantage suffered by the injured party has (also) led to an advantage for the injuring party in terms of a supply received.

In a recent decision, the European General Court (EGC) had to rule on whether the unauthorised use of a protected work provides the user with a consumable advantage and can therefore be classified as a “supply of services for consideration”. According to German practice, compensation for copyright infringement has, to date, been treated as “genuine” (non-taxable) damages. The German Federal Court of Justice (BGH), which is responsible for damage claims, and the German Federal Ministry of Finance (BMF), which is responsible for VAT, agree that damages payments – even when calculated according to the so-called licence analogy – are outside the scope of VAT. The EGC has now contradicted this view in its judgment of 11 February 2026 (case T-643/24 – Credidam).

2    Facts

Credidam is a Romanian collective management organisation responsible for the collective management of copyright and related rights. The defendant, the operator of a guest house, is alleged to have publicly reproduced sound recordings and audiovisual content without the necessary licence. According to the national conditions, the user who has not been granted the necessary licence beforehand owes three times the amount of remuneration he would have owed if he had held the relevant licence. Credidam calculated an amount, including VAT, and brought a legal action for payment, which was later dismissed by the court of first instance. Credidam then appealed against the judgment. The Court of Appeal stayed the proceedings and referred the question to the EGC as to whether the remuneration – including the surcharge – was taxable.

3    Decision of the General Court

The EGC held that the remuneration constitutes taxable consideration. In the Court’s view, the unauthorised public reproduction of a protected work results in the procurement of a service: the user obtains a consumable advantage through the use. It is irrelevant whether the rights holder can authorise or object to the use. The principle of VAT neutrality prohibits any differentiation between authorised and unauthorised uses. The only decisive factor is that the user has actually used the protected work and that national law provides for a claim for remuneration. The collective management organisation acts on behalf of and for the account of the rights holders when collecting the remuneration. In the opinion of the EGC, the surcharge is also part of the taxable amount. The crucial factor is the subjective value of the consideration actually owed, not the civil law classification in the form of damages or even as a penalty. The entire amount specified by law is therefore regarded as consideration for VAT purposes.

4    Consequences for the practice

The decision is in line with previous jurisprudence of the ECJ on the VAT treatment of damages. The only crucial factor is as to whether the person liable for payment has obtained a consumable advantage. The fact that there is no contractual relationship or that the payment is owed by law does not preclude VAT liability. It is decisive that the injuring party has obtained a factual possibility of use and must pay for this purpose.

In cases of infringement of copyright and related rights, this is likely to mean a fundamental rethinking of the prevailing opinion in Germany (see also BMF, letter dated 1 October 2021). The EGC does not share the traditional understanding of a taxable supply as being a conscious and deliberate act. Both the ECJ and the EGC do not consider a will to render supplies to be necessary. Therefore, even a supply obtained by deception or even coercion may be taxable. This decision contradicts previous German jurisprudence and administrative opinion.

The previous (sometimes generous) view of the German tax authorities is at stake. The tax authorities will have to critically question the previous approach and the distinction made between genuine and non-genuine damages. The full scope of the new jurisprudence cannot yet be foreseen. In practice, however, legal certainty is essential. The injured party must know whether VAT is required to be deducted from the damages or added on. This point must already be taken into account when assessing damages.

The tax authorities must now consider whether and how they will implement the judgment. As long as the German Administrative VAT Guidelines and the above-mentioned BMF letter remain unchanged, rights holders and injured parties may rely on the previous interpretation of the tax authorities. Nevertheless, it would be prudent to adapt to the new line of jurisprudence at an early stage.