CJEU on adjustments of VAT deductions for written off goods

Between 2014 and 2017, a Bulgarian telecommunications company sold selected written-off fixed assets as waste, destroyed them, or disposed of them. Accordingly, the company had adjusted the VAT deduction. However, in 2019 they applied for a refund of the adjustments made on the ground that Bulgarian law was in that regard incompatible with the VAT Directive. The tax administrator rejected the application while the court threw out the subsequent legal action. The company, therefore, filed a cassation complaint, and the Court of Appeals referred the question to the CJEU.

Article 185 of the VAT Directive generally states that no VAT adjustment shall be made in respect of transactions remaining totally or partially unpaid. Also, no VAT adjustment shall be made for the destruction, loss or theft of property duly proved or confirmed. However, member states may require adjustments in respect of unpaid or partially unpaid transactions, and in respect of theft.

The Bulgarian court referred to the CJEU the question of whether writing off goods was a change in the factors used to determine the amount of input VAT deducted if the goods were subsequently sold. The court's answer was that the sale of goods constituted a taxable supply linked to the right to deduct. The fact that it was a sale of waste outside the normal economic activity was irrelevant.

Additional questions were referred to the CJEU as to whether the duly proved destruction or disposal of goods written off was a change in the factors used to determine the amount of the deducted input VAT. Here, as well, the CJEU ruled in the affirmative, although the change does not give rise to the obligation to correct the deduction if the destruction is duly proved and justified.

The destruction or loss of goods necessarily entails the disappearance of any possibility of using them in the context of taxable transactions. Logically, loss cannot be the result of a deliberate action on the part of their owner, whereas that cannot be ruled out in the case of destruction.  The destruction of assets decided upon because of the objective loss of their usefulness in the taxable person’s usual economic activities thus meets the conditions of Article 185.

Finally, the Bulgarian court referred to the CJEU the question whether Article 185 of the VAT Directive precludes national legislation that requires the VAT deduction to be adjusted when goods are written off. It is clear from the conclusions on the previous questions that such national provisions are incompatible with Article 185. Furthermore, the destruction of goods is not one of the cases in which Article 185 allows member states to require the adjustment of deductions.