7.2.2 Case 2

An insurance company has some writing paper in stock. As a result of a merger, the name of the company is changed and the writing paper is sold as waste paper (at a very low price) to a company specializing in the processing of waste paper. The insurance company did not deduct the VAT on the purchase of the writing paper. Can it adjust the deduction of the input VAT on the purchase of the paper (i.e. recover the input VAT), which is not used for its original purpose?

If the writing paper had been used, the supply would have been VAT exempt (without the right to deduct). However, since the writing paper has not been used, the supply is taxable, which entitles the insurance company to recover the input VAT (the VAT on the purchase of the writing paper).

The supply of the unused writing paper is taxable. The input VAT which was initially not deducted can be adjusted (meaning: reclaimed) under regulation 109.

If the paper was purchased before 1 January 2005 there is no mechanism for adjustment.1 If the paper was purchased on a later date, the input VAT can be adjusted on the basis of § 15a UStG.

The input VAT can be adjusted. This might, however, be challenged by the tax authorities, should the price be so low that the transaction could be regarded as free of charge.