The cost price serving as a VAT base in the case of free transfer of goods was interpreted by the ECJ
C‑207/23. – Y KG | In the case of free transfer of goods, the VAT liability is not affected if the received product is used by another taxable person for economic activities that qualify for VAT deduction. The basis for VAT is the cost price, which includes indirect costs, in the absence of a similar product’s purchase price, regardless of whether these costs were subject to VAT.
The plaintiff in the German-related case operates a facility producing biogas from biomass (Y KG), which transferred a portion of the heat energy it additionally generated for free to companies ‘A’ and ‘B’, used by these companies for their economic activities (wood drying, heating asparagus fields). The German tax authority determined that the free transfer of extracted heat energy is subject to VAT, and in the absence of a purchase price, calculated the tax base of the free transfer based on the cost price of the heat energy.
The German Federal Finance Court initiated a preliminary ruling procedure to clarify whether the free transfer of products remains subject to VAT even if the product is utilized for taxable business activities by another taxable person and whether the determination of the VAT base based on cost price should only consider direct production or manufacturing costs, or indirect costs (e.g., financing costs) should also be considered. Additionally, the question arose whether only costs with VAT charged should be included in the tax base of the free transfer of goods.
The European Court of Justice confirmed in its ruling that if a taxable person transfers goods extracted from its business for free to another party, it is irrelevant for VAT purposes whether the recipient uses the product for activities that qualify for VAT deduction. The ruling is also points out that if the tax base for free transfer of goods must be determined based on cost price, in the absence of a similar product’s purchase price, not only direct costs (production, manufacturing) but also indirect costs (e.g., financing costs) must be considered, regardless of whether these costs are including VAT charged.
