TLDR: Commercial damage compensations are not subject to VAT if their sole purpose is to repair a damage and they do not constitute consideration for a service or supply of goods. In the case of a lump-sum compensation, only the portion corresponding to an individual service is taxable, provided it can be separately identified.
General principle of VAT exclusion
A compensation for commercial damage is not subject to VAT as long as its sole purpose is to repair a damage and it does not represent consideration for a service or supply of goods. This principle also applies to common commercial damages, provided there is no link to a taxable transaction.
Judicial compensations
Compensations set by a court for illegal occupation of a property or any other commercial damage are not subject to VAT. They solely aim to compensate the suffered damage and do not constitute remuneration for a service or transfer of goods.
Lump-sum compensations: mandatory allocation
If a lump-sum compensation includes both a reparative component (non-taxable) and a portion remunerating individual services (taxable), it is essential to allocate these components and apply the corresponding tax treatment to each. For example, a compensation covering both damage and unpaid commissions must be split.
Condition for VAT taxation
For a compensation to be subject to VAT, it must constitute direct consideration for an individual service provided to the payer or a supply of goods. In the absence of this link, the compensation falls outside the scope of VAT.
Practical examples
Compensations paid for illegal occupation of premises, loss of customer base unrelated to a service, or pure commercial damage are not taxable. Conversely, amounts corresponding to individual services (e.g., unpaid commissions) are subject to VAT.
Limits and precautions
A case-by-case analysis is essential: a compensation cannot be automatically considered exempt. Its purpose, link to a taxable transaction, and, where applicable, clear allocation between taxable and non-taxable portions must be verified.