Commentary on Judgment No. 10837 of 2024: Compensation for Actual Damages and Taxation

Judgment No. 10837 of April 22, 2024, by the Court of Cassation offers an important reflection on the subject of compensation for actual damages and its taxation. In particular, the Court reiterated that sums due as compensation for damages are not subject to VAT, but only to proportional registration tax. This clarification is crucial for understanding the tax dynamics related to damages for breach of contract.

The Issue of Compensation for Actual Damages

Compensation for actual damages represents the immediate economic loss suffered by the owner of the asset due to a breach of contract. According to the Court, this type of damage includes not only direct loss but also the economic value of the performance to which the creditor would have been entitled. The judgment in question affirmed that such compensation does not contribute to forming the taxable base for VAT, pursuant to Article 15 of Presidential Decree No. 633 of 1972.

Relevant Tax Legislation

In general. A judgment ordering compensation for actual damages – which corresponds to the immediate economic loss caused to the asset owner, and which also includes the economic value of the performance to which the creditor was entitled and did not receive as a consequence of the breach – is subject to proportional registration tax, as, pursuant to Article 15 of Presidential Decree No. 633 of 1972, sums due as compensation for damages, as well as for late payment interest, penalties for delays, or other irregularities in the fulfillment of contractual obligations, do not contribute to forming the taxable base for VAT, which arises from the supply of goods and the provision of services. (In this specific case, the Supreme Court confirmed the appealed decision which had deemed the amount due as compensation for actual damages not subject to VAT, instead subjecting the court's judgment, which had upheld a claim for contract termination and ordered the defendant to pay compensation for breach of contract, to proportional registration tax).

This principle is based on a clear distinction between compensation and sums arising from the supply of goods or provision of services, which are instead subject to VAT. It is important to note that, in situations of breach of contract, compensatory sums are treated differently from revenue derived from normal commercial transactions.

Practical Implications of the Judgment

• Clarity on how to fiscally treat compensation for actual damages.
• Distinction between proportional registration tax and VAT for compensatory sums.
• References to previous case law supporting the established principle.

The implications of this judgment are significant for professionals and taxpayers, as they offer guidance on how to proceed in cases of litigation related to breaches of contract.

Conclusions

In conclusion, Judgment No. 10837 of 2024 by the Court of Cassation represents an important step forward in understanding the taxation of compensation for actual damages. The distinction between VAT and proportional registration tax clarifies the methods of taxation and provides a solid legal basis for addressing tax issues related to breaches of contract. It is essential for professionals and taxpayers to be informed about these provisions to avoid unpleasant surprises in tax matters.