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VAT Due On Unused Flight Tickets, Rules EU's Top Court

by Ulrika Lomas,, Brussels

05 January 2016

The European Court of Justice recently ruled that value-added tax (VAT) is chargeable on unused air tickets that are not refundable, in Air France -KLM and Hop!-Brit Air v. Ministère des Finances et des Comptes publics (C-250/14 and C-289/14).

Air France-KLM (Air France until 2004) 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 to the French tax authorities VAT on the sale of tickets that passengers had not used and for which they could not claim a refund. Since they considered that VAT was payable on those tickets, the tax authorities notified Air France-KLM of additional assessments to VAT amounting to EUR4m (USD4.3m) (excluding default interest) covering a period of three years.

In addition, a subsidiary of Air France, Brit Air (which became Hop! Brit Air in 2013), performed at that time air passenger transport services in the context of a franchise agreement concluded 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. In respect of tickets not used by passengers, Air France-KLM paid Brit Air an annual flat-rate compensation calculated as a percentage (2 percent) of the annual turnover (including VAT) from the routes operated as a franchise. Since Brit Air did not subject that lump sum to VAT, the tax authorities also sent it demands for VAT.

Ruling at last instance on the dispute between Air France-KLM and Brit Air, on the one hand, and the tax authorities, on the other hand, the French Conseil d'État (Council of State) was unsure as to whether the unused transport tickets may be subject to VAT.

In its judgment, the ECJ answered that question in the affirmative. The Court noted that VAT is payable where, first, the sum paid by the customer to the airline company is directly linked with a service (in the present case, air transport) and, second, that 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 enables 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 (in the present case, 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.

TAGS: court | Finance | tax | value added tax (VAT) | interest | law | aviation | France | European Union (EU) | services | VAT case law | Europe

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