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In the first half of this year, the Court of Justice of the European Union (the “CJEU”) decided on a duty to correct an originally implemented VAT deduction in relation to goods that were sold as waste with a loss or voluntarily destructed (C–127/22). This article sums up that judgment, the whole text of which you can read here.

What Was the Judgment About?

A VAT payer wrote off various goods considered unsuitable for use or sale for various reasons, including wear and tear, defects or their obsolete or unsuitable nature. Next, some of those goods were sold as waste to taxable third-party undertakings and others were destroyed or disposed of. The matter in dispute involved the fact whether the VAT payer was required to adjust the original deduction of input VAT upon acquisition for such written-off goods.

The CJEU’s Opinion

The CJEU first asked a question if the loss-generating sale of goods as waste to a third party constituted “a change in the factors taken into account to determine the amount to be deducted”, i.e. a situation where the payer is required to adjust the originally implemented VAT deduction. It is no surprise that the CJEU arrived at a conclusion in this regard that it is not necessary to adjust the tax’s deduction in such case. It is irrelevant according to the CJEU that the the value of the goods concerned was reduced in relation to their initial value, by reason of the fact that they were sold as waste or that, for the same reason, their original nature had been changed. Such circumstances are not such as to bring about a break in the close and direct relationship between the right to deduct input VAT paid on the purchase of the goods concerned and their use for taxable output transactions.

What was interesting though was to see the CJEU’s opinion on goods that were voluntarily destructed. The VAT Directive sets forth in Article 185 that no adjustment of the originally exercised deduction of input VAT shall be made in the case of destruction, loss or theft of property duly proved or confirmed (transposed to the local VAT law in Section 77 of the VAT Act).

In CJEU’s view, the term “destruction” refers to the action of profoundly altering an object, making it disappear by demolishing it and eliminating it. The term “loss” refers to the fact of being deprived of something owned or enjoyed. It follows that the loss of goods cannot be the result of a deliberate action, whereas that cannot be ruled out in the case of destruction.

According to the CJEU, such situation (voluntary destruction) constitutes “a change in the factors taken into account to determine the amount to be deducted” pursuant to Article 185 of the Directive. However, if such destruction is duly proved or confirmed and if the goods concerned had objectively lost all usefulness in economic activities, such change in factors should not establish a duty to make an adjustment.

As a result, the above-mentioned judgment of the CJEU confirms the to-date administrative practices (see the Information of the General Financial Directorate). In such situations, we recommend paying increased attention to whether the economic potential of destructed goods has been exhausted, as mentioned by the CJEU, and subsequently proving the goods’ elimination alone.

If you need more information on this topic, please feel free to contact us. 

Michaela Kozminská
kozminska@edmutilitas.cz