Relief from sales tax on donations in kind

For the turnover taxation of donations in kind, the Federal Ministry of Finance has, in addition to clarifications for practice, also created an equity regulation for the Corona period.

Like all free gifts, donations in kind from business assets are subject to VAT if the donated item was eligible for input tax deduction at the time of purchase. This VAT taxation serves to compensate for the input tax deduction and is intended to prevent untaxed final consumption.

Goods that are no longer suitable for sale but are otherwise still perfectly usable and would therefore often be of great help to charitable organizations are therefore destroyed or disposed of instead of being donated, as the VAT on the donation in kind is often higher than the cost of disposal. What makes sense for the state from a purely tax and fiscal point of view has thus far had absurd consequences in practice.

The EU VAT Directive does not provide for the possibility of generally waiving VAT on donations in kind from business assets for reasons of equity. However, there is leeway in the assessment basis for the VAT due on a donation in kind, as the assessment basis of a donation in kind is not based on the original acquisition or production costs, but on the notional purchase price at the time of the donation.

The tax authorities have now exhausted this leeway and clarified with an amendment to the VAT application decree when donations in kind can be recognized with a value of EUR 0 or at least a significantly reduced value. At the same time, there is also a temporary equity regulation for the corona crisis, according to which VAT is completely waived in certain cases.

This equitable provision allows retailers who are directly and not insignificantly negatively affected economically by the coronavirus crisis to donate goods to tax-privileged organizations without the free transfer of value being taxed. It is true that the donation might have remained free of VAT anyway if the goods had been valued at EUR 0. However, the equity regulation gives those affected more legal certainty and saves them having to document the assessment basis for the donation. The waiver of VAT only applies to donations in kind between March 1, 2020 and December 31, 2021.

In all other open and future cases, the supplement to the application decree applies instead, according to which, when determining the assessment basis, it must also be taken into account whether items are no longer marketable or only marketable to a very limited extent at the time of the free transfer of value due to their nature.

This is the case for foodstuffs if they are close to their best-before date or are no longer saleable as fresh goods (fruit, vegetables, baked goods, etc.) due to defects. The same applies to non-food items with a best-before date, such as flowers, pet food, cosmetics, drugstore items, silicone mass and other perishable goods.

The marketability of other items is restricted if they are no longer marketable or are difficult to sell due to significant material or packaging defects (filling errors, incorrect labeling, damaged returns, etc.) or a lack of marketability (previous year's or seasonal goods, Christmas or Easter items, etc.). If such goods are given away free of charge, a reduced assessment basis can be applied in comparison to goods that are still marketable.

The reduction is to be made to the extent of the reduction in marketability, so that an assessment basis of EUR 0 can only be considered for worthless goods, e.g. for food and non-food items shortly before the best-before date or for fresh goods that are no longer marketable.

On the other hand, there is no restricted marketability if flawless new goods are discarded solely for economic or logistical reasons. Even if these new goods would otherwise be destroyed because packaging is damaged, clear traces of fitting are visible on clothing or goods are soiled without being damaged, this does not mean that the new goods lose their marketability completely. In such cases, a fictitious purchase price must be determined on the basis of objective appraisal documents.

The Ministry has also clarified once again that the sale of an item for far less than the original purchase price does not constitute a donation in kind. With the exception of special cases, no fictitious purchase price is to be determined for the item because the assessment basis for VAT is the consideration actually paid.