1.2. Compensations
1.2.1. Compensation and similar payments that do not arise in return for any delivery or service are not subject to VAT in principle.
In this context, payments made under the names of compensation, termination fee, etc., which are penal clauses due to reasons such as failure to perform the work in accordance with the terms of the contract, failure to complete the work within the given time, termination of the contract, are not subject to VAT since they are not in return for any delivery or service.
Accordingly;
(1) In the event that a delay penalty is accrued to the contractor due to delays caused by the contractor in construction, repair, material and service procurement works tendered and concluded by the municipality, the amount collected from the contractor under the name of delay penalty pursuant to the contract will not be subject to VAT. On the other hand, the collection of the delay penalty by deducting it from the progress payment does not affect the VAT amount that the municipality must pay to the contractor.
(2) Severance payments paid to employees by employers are not subject to VAT since they are in the nature of wages. Therefore;
– Due to the transfer of employees to another employer without terminating their employment contracts, the calculation of the compensation amounts of the employees until the transfer date and their transfer to the new employer,
– Due to the termination of the employment contracts of the employees by the new employer or their gaining the right to retirement, the transfer of the part of the compensation amounts for which the old employer is responsible to the new employer
will not be subject to VAT.
(3) Insurance compensations that do not constitute a consideration for a delivery or service or do not arise as a result of this are not subject to VAT. In this case, VAT will not be calculated for the compensation received by the insured from the insurance company for the damaged goods.
However, in cases where the insured taxpayer has the damaged goods repaired and collects the repair cost from the insurance company by presenting invoices issued in his/her name, an invoice must be issued and VAT must be calculated so that the expenses incurred by the insured on behalf of the insurance company and subject to VAT are reflected to the insurance company as is.
1.2.2. Article 24/c of the VAT Law stipulates that various incomes such as maturity difference, price difference, interest, premium and all kinds of benefits, services and values provided under the names of service and similar are included in the VAT base.
Accordingly, since the payments made in return for a delivery or service subject to VAT are included in the base, even if they are under the name of compensation, VAT must be calculated on them at the rate to which the delivery or service is subject.
For example, the 5% late payment compensation received from the subscriber due to the payment of the electricity bill after its due date will be included in the VAT base and VAT will be calculated on the total amount.
1.3. Membership Fees
Membership fees collected from members or participants are not subject to VAT, provided that they do not constitute consideration for any delivery or service. For example, membership fees from the income specified in the association’s statute will not be subject to VAT.
However, membership fees paid in return for commercial deliveries and services of a cooperative that is subject to corporate tax and are considered an element of the corporate income will be subject to VAT. For example, membership fees paid by members of cooperatives that are subject to corporate tax, such as consumer and transportation cooperatives, and are considered an element of the corporate income are subject to VAT. Membership fees collected by cooperatives that are not subject to corporate tax in order to meet common expenses (meeting the needs of members such as security, gardening, maintenance of pools and social facilities, electricity and water) will not be subject to VAT, as they are not commercial in nature.
Source: VALUE ADDED TAX CIRCULAR/60
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