Czech Republic: Guidance on application of VAT to gratuitous supplies of goods

The General Financial Directorate (GFD) issued guidance (dated 1 August 2023) on the application of value added tax (VAT) to gratuitous supplies of goods.

Under the new guidance, which replaces guidance from 2014 that applied only to food donations to food banks, donations of perishable food and non-food goods with a minimum expiry date is facilitated and donations to charitable institutions or directly to persons in need is allowed.

If a VAT payer has legitimately claimed the right to deduct VAT on the donated goods (i.e., if, when acquiring the goods, the payer did not yet know that they would later donate these goods), then they must pay output VAT. (This does not apply to samples or gifts of low value used for economic activity.) The donor is therefore faced with the question of how to determine the tax base for the payment of VAT. The guidance distinguishes several options for determining the tax base, depending on the method of acquisition of the goods. If the donor of the goods:

• Originally purchased the goods, then the tax base is primarily the current residual value of the goods at the date of donation (i.e., the acquisition cost of the goods possibly increased by the costs of modification/improvement/modernization of the goods and decreased by the value of physical wear and tear and obsolescence at the date of donation). Under certain circumstances, however, it is also possible to derive the tax base from the actual market value that considers the state of the goods at the date of their donation.
• Obtained the goods other than by purchase (e.g., when donating their own products), then the tax base is primarily the price of similar goods (market value) at the date of donation. However, if the goods are unique in their own way and cannot be found on the market (i.e., it is not possible to determine their market value), then the tax base is the total cost of acquiring the goods by the donor at the date of donation, including any costs of modification, improvement, or modernization.

When determining the tax base, donors must also consider the type of goods in question, their condition at the time of donation, and the situation on the market for these goods or the stage of their sales process. The GDF’s guidance makes it possible to use a minimum or almost zero tax base in specific situations. Unsurprisingly, these involve donated foods that are no longer saleable or difficult to sell (e.g., with an approaching expiry date/best before date, with unsatisfactory or damaged packaging, ready-made food unsaleable due to the end of opening hours, etc.). However, the GFD now allows the same approach also for non-food goods with a minimum best-before-date or perishable goods such as cosmetics, drugstore and pharmaceutical goods, animal feed, construction chemicals, or flowers.

On the other hand, donors cannot use a tax base close to zero if they donate currently tradable goods (laptops, mobile phones, office supplies, etc.) even if they have charitable intentions. In these cases, the tax base will continue to equal their market value.

Donors must be able to prove how they determined their tax base. Thus, not only preparing arguments, but also (photo) documentation of the condition of the donated goods is a must. And if donors already know when purchasing goods that they will donate these specific goods, then they cannot claim their right to deduct VAT and need not deal with any output VAT.

Read a September 2023 report prepared by the KPMG member firm in the Czech Republic