The purpose of a court settlement is for the clients to definitively resolve their differences through mutual concessions. In practice, this means that the settlement often covers not only what was formally the subject of the claim, but also other outstanding issues between the same clients. As a rule, the clients wish to ensure that, once the settlement is signed, there remains no doubt as to what has been settled and what has not. The aim is simple: to bring the relationship to a complete close.
It is precisely here that tax issues may arise. What is understood under law of obligations as a comprehensive and final settlement of all mutual obligations is not always entirely clear from a tax perspective in proceedings before the Financial Administration of the Republic of Slovenia (FURS). Particularly with regard to VAT, the question may arise as to whether it is possible to adjust the tax base even in respect of a claim that is not explicitly named in the court settlement, even though it was covered in substance by the compromise between the clients.
The scope of a court settlement is not limited solely to the formal statement of claim
In assessing what is covered by a court settlement, it is not only the value of the dispute or the form of the claim in the individual proceedings that is decisive. What is essential is its actual content. Article 306(2) of the Civil Procedure Act (ZPP) expressly provides that a court settlement may cover the entire claim or part thereof, and may also include the resolution of other contentious issues between the clients. The Act itself therefore provides that a single settlement may also resolve broader outstanding issues that go beyond the narrow procedural framework of the specific case.
This understanding is also confirmed by case law. In case Cp 158/2021, the Celje Higher Court emphasised that a court settlement may also cover other contentious issues between the clients, not merely those directly covered by the claim. The Supreme Court of the Republic of Slovenia, however, consistently holds that a court settlement is a contract in substantive law terms and must therefore be interpreted in accordance with the rules of the law of obligations. This means that individual provisions must not be interpreted in isolation, but in their mutual context and taking into account the common intention of the contracting parties. This approach stems in particular from ruling II Ips 532/2008.
For practice, it is important that a claim not expressly named may be covered by a settlement if it follows from the text of the settlement and the circumstances of its decision that the clients intended to comprehensively settle all outstanding matters. In case II Ips 225/2006, the Supreme Court of the Republic of Slovenia held that the settlement also covered maintenance payments, even though they were not specifically named, as the purpose of the settlement was the comprehensive settlement of mutual relations. A similar conclusion can be drawn from the decisions VSK Cpg 85/2014 and VSL I Cp 1494/2022, where it was emphasised that a clause under which the clients have no further claims against one another as a rule implies the final settlement of all matters falling within the factual basis of the settlement.
Where the settlement also covers an invoice that is not expressly defined
A court settlement relating to the fulfilment of all and any mutual obligations and the final settlement of all mutual disputes constitutes, in substance, a comprehensive settlement of all outstanding claims that existed between the parties at the time the settlement was concluded.
A tax law issue arises in particular where, prior to the conclusion of the settlement, the supply had already been made, the invoice issued and VAT charged, but the clients subsequently settle their obligations differently through the court settlement, generally for an amount lower than that originally claimed for VAT purposes. The economic substance of the settlement lies precisely in the fact that the clients redefine the final extent of their mutual obligations through a compromise.
If a legally binding reduction in the originally claimed payment results from the court settlement, the question arises as to whether the originally invoiced tax base still reflects the actual economic substance of the transaction. In such a case, the amount originally charged generally no longer reflects the amount which the supplier is actually entitled to retain following the final settlement of the relationship. This is the essence of the situation governed by Article 39(2) of the Value Added Tax Act (ZDDV-1), i.e. if the price is reduced after the supply has been made, the tax base is also reduced accordingly.
In this regard, both substantive and formal conditions must be met. Substantively, there must be an actual reduction in the obligations, whilst formally, the reduction must be properly documented and the recipient notified thereof. This is precisely why it is important in court settlements that their content clearly shows that a change in mutual obligations has occurred and to what extent this change has taken place.
The importance of transparency
Although a court settlement is valid and effective from the perspective of the law of obligations even with a general formulation regarding the settlement of all mutual relations, from a tax perspective it is advisable that its effect be as clearly evident as possible. The more specifically the obligations to which the settlement relates are defined, the less scope there is for subsequent doubts as to whether there has been an actual reduction in price or in obligations relating to specific invoices.
As a rule, the tax authority will not rely solely on the civil law trial of the settlement, but will assess its actual content and connection with the tax consequences already calculated. Therefore, in practice, it makes sense for the court settlement, accompanying correspondence, credit notes and other relevant documentation to be mutually consistent. It is precisely the documentary trail that is often decisive in assessing whether there has been a subsequent reduction in a specific payment and, consequently, a basis for a VAT adjustment.
Conclusion
A court settlement is not merely a procedural mechanism for resolving a dispute, but a legal instrument with direct effects on the tax treatment of the relationship between the parties. When the parties use it to newly and definitively settle the amount of their mutual obligations, the tax assessment must follow this altered economic and legal substance of the transaction. It is true that, from the perspective of legal certainty, it is always preferable for the reduced obligations, their scope and effect in the settlement and the accompanying documentation to be defined as clearly as possible. However, even potentially incomplete or less precise wording in the settlement should not in itself lead to a narrow and excessively formalistic interpretation. In the assessment, account must be taken of the very nature of a court settlement as an agreement involving mutual concessions and the clients’ shared intention to comprehensively and definitively settle outstanding matters. If it is apparent from the content of the settlement and the circumstances of its conclusion that a final and different scope of obligations was agreed, this should also be reflected in the tax treatment. Nevertheless, it should be emphasised that a well-prepared court settlement does not merely signify the conclusion of a dispute, but also provides an important basis for a tax-compliant and substantively sound trial, thereby avoiding complications in tax procedures.
