§ 15a input VAT adjustment in the case of assets that have become unusable - ECJ ruling (C-127/22) of 4 May 2023

If an entrepreneur claims an input VAT deduction for an object but then uses that object differently than intended, it may be necessary to adjust the input VAT. In a Bulgarian case, the ECJ dealt with the question of whether the disposal, destruction, or sale of assets that have become unusable requires that such an adjustment be made.

The facts

The Bulgarian Balgarska telekomunikatsionna kompania (BTK) is active in the telecommunications industry. It has discarded various installations, equipment, or devices because, for example, they were deemed worn out, faulty, obsolete, unusable, or unsaleable. The items were either sold as waste to other entrepreneurs, or they were destroyed or disposed of.

The decision

The ECJ had to decide whether these transactions were to be regarded as a "change in the factors" taken into account for the deduction of input VAT within the meaning of Article 185 of the VAT Directive and whether this then required an input VAT adjustment. Art. 185 of the VAT Directive is the basis under EU law for § 15a UStG (German VAT Code), which regulates the input VAT adjustment in Germany. While § 15a UStG merely stipulates that an input VAT adjustment must be made in the event of a "change in circumstances" without defining what constitutes such a “change in circumstances”, Art. 185 of the VAT Directive explicitly limits the scope of application. Accordingly, no input VAT adjustment is to be made in duly proven or documented cases of destruction or loss.

The ECJ ruled that the sale as waste was a taxable transaction so the right to deduct input VAT still existed. The fact that this is not BTK's usual economic activity is irrelevant.

Although the destruction of the assets constitutes a change in the factors relevant to the original input VAT deduction, it is expressly exempted from the obligation to adjust input VAT under Article 185 of the VAT Directive if it is duly proven or documented. The concept of destruction also includes destruction by the taxable person, even if it is not an unforeseen or unavoidable event. The same applies to disposal if it leads to the irreversible disappearance of the object.

Only in the case of the last question referred for a preliminary ruling, the significance of which is not apparent, does the ECJ add an additional condition: The object must have objectively lost all usefulness within the context of the taxpayer's economic activity.

Practical significance

The specific circumstances that trigger an input VAT adjustment obligation are not specified in § 15a UStG. In section 15a.2 para. 2 and 6 UStAE (administrative guidelines to the German VAT Code), the BMF (Federal Ministry of Finance) has drawn up lists of sample cases in which the input VAT must be adjusted, but these are not exhaustive, and above all, they do not provide guidance on which cases do not require an adjustment. Accordingly, the cases of loss and destruction are not mentioned. However, this exclusion from the obligation to make adjustments also applies in Germany via Art. 185 VAT Directive. With regard to the culling of assets due to uselessness, the ECJ ruling provides more clarity. However, disputes may still arise regarding the question of whether an asset has objectively lost all usage value. Keeping everything well-documented is recommended here.

Dated: 23 May 2023