Financial Administration’s information on gratuitous supplies and opinion on right to deduct VAT in subsidy projects
The Financial Administration has issued an updated version of its Information on the application of VAT to gratuitous supplies of goods. It clarifies the rules for determining the taxable amount (tax base) in the case of charitable donations of goods. At the same time, it has also published its opinion on the right to deduct input VAT where services are provided free of charge under a grant programme.
Information on gratuitous supplies of goods
The updated Information on gratuitous supplies of goods extends the interpretation regarding determination of the taxable amount (tax base) for the purpose of remitting output VAT when providing charitable in-kind assistance (e.g. donations to food banks). For such donations, it may be possible, in certain cases, to determine the tax base in a fractional amount.
To support the nature of such donations, records must be kept showing to whom, when and in what quantity the goods were donated – for example, donation agreements, handover protocols, warehouse records, accounting records or photographic documentation. The General Financial Directorate also recommends documenting that the recipient of the donation actually carries out the declared charitable or social activity.
The Information explicitly expands the range of goods for which the taxable amount may be determined at a very low value to include clothing and textiles: this may include, for example, situations where textiles with minor defects are donated.
This category of donations also covers goods that are priced at a very low value because of the payer’s business strategy – i.e. where the goods are no longer marketable due to a business policy (e.g. last year’s clothing collections). In such cases, however, it is necessary to demonstrate the existence of a long-term business strategy, formalised internal procedures for handling goods, a system of gradual discounting of goods, or to provide evidence that genuine efforts were made to sell the goods.
The updated Information also stipulates further requirements for evidence in cases where the tax base is set at a very low amount. Where the value of the goods is very low, supporting evidence should be available to demonstrate the age of the goods, their technical or aesthetic properties, lack of demand for the goods, storage or disposal costs, or the reasons why the goods can no longer be sold as usual. This may include internal policies, warehouse records, documentation of discount campaigns, advertising leaflets, marketing campaigns, photographs from stores or evidence that the goods were no longer offered even through outlet channels.
Opinion on the right to deduct VAT in subsidy projects
The Financial Administration also published its response to a methodological query concerning the right to deduct VAT by entities engaged in subsidy projects. The query concerned situations where a company carried out project activities using its own employees and technologies. The entire project was financed from a subsidy (grant); however, the company did not act as a supplier to the other project partners, and the funds received from the grant represented solely the reimbursement of eligible costs, rather than consideration for the activities performed.
The Financial Administration emphasised that the source of financing is not decisive for the right to deduct input VAT – what matters is how the taxable supplies received are actually used. In this respect, the standard rules governing the right to deduct input VAT must be followed.
If the raw materials, construction work, transport or other services used exclusively for gratuitous project activities are not directly linked to the company’s economic activity, the right to deduct VAT generally does not arise. The Financial Administration also noted that potential know-how, experience, client references or publicity that the company may have gained from participating in the project do not in themselves constitute sufficient grounds for claiming the deduction.
On the other hand, the right to deduct input VAT may be granted if the company demonstrates that it uses, or intends to use in the future, the project results for carrying out its taxable activities. Typically, this may involve the development of a new product, technology, methodology or service intended for commercial use, or project outputs that are subsequently used in providing paid services or carrying out commercial contracts. The decisive factor is the existence of objective evidence, such as business plans, contracts, calculations or commercial offers.
Some situations may also involve a combination of both: where only a part of the activities carried out serves the company’s further commercial use. In such cases, the entitlement to deduct input VAT may be claimed on a pro rata basis.
The published opinion therefore confirms the basic principles of claiming input VAT: the existence of a subsidy itself is not decisive, what matters is above all the purpose and manner in which the specific supplies received are used. Each subsidy project must therefore be assessed individually, taking into account its link to the recipient’s economic activity and the evidence supporting that link.