The Constitutional Court has settled the dispute on VAT and continuing contracts

The Constitutional Court issued Judgment No. 41-P in the case of VTB against Sitronics IT, and in substance rewrote the approach to how a business must cope with a change in tax legislation inside contracts that have already been made.

In short, there is no longer any automatic adding of VAT "on top" of an old contract.

What the Constitutional Court said:

1. The legislation has a gap. There is no mechanism for what is to be done with the price of a continuing contract if the VAT rules change after the contract has been made.

2. Because of that gap, the courts began to allow a supplier simply to charge the buyer the full VAT "on top", even a buyer who cannot deduct it.

3. The Constitutional Court held that practice to be unconstitutional: it upsets the balance of the parties' interests and turns the buyer into a "tax sponsor".

The Constitutional Court's interim rule, until the legislation is changed:

A supplier may demand an increase in the contract price of no more than 50% of the VAT that it is now obliged to pay.

• Only if the buyer has refused to renegotiate the contract or to terminate it.

• The price cannot be changed in a contract with an individual who is not an individual entrepreneur.

• State contracts follow the special rules of the procurement legislation.

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