6.6.3.3 Exemption with credit – the private application or use of business assets that are goods

The VAT exemptions regarding the supply of goods that allow VAT deduction only relate to cross-border supplies of goods.1 The supply of goods to a business that is established in another EU Member State, where these goods are transported by the supplier to another Member State as a result of that supply, is an example of such a VAT exempt supply.2

The private application or use of business assets that are goods could qualify as VAT exempt intra-Community transaction if, for example, the goods are supplied for free to another business that is established in another EU Member State, and the goods are transported to this business as a result of this supply.3

Application of the zero rate to this supply would imply that the supply qualifies as an intra-Community supply of goods,4 which would require the recipient of the goods to account for VAT on the intra-Community acquisition of these goods in the country where the transport of the goods ends.5 The person liable for this VAT is the recipient of the goods.6 This means that if all relevant VAT rules would apply to this transaction, the recipient of the free goods would have to account for VAT (as payable) on the acquisition of his ‘gift’ to an amount that is unknown to him (probably nil, as that would be his purchase price). He would technically account for the VAT that, basically, should be adjusted by the provider of the goods.

However, because the relevant rules regarding the taxation of gifts under the ‘taxation of free supplies for private consumption’ provisions are a method of adjusting the VAT deducted by the supplier of the goods or services, the liability for this adjustment should not be shifted to another party. For the same reason, the zero rate should not be applied: that would not cause any adjustment of the deducted VAT. In my view, this also applies to goods that are supplied (for free) to recipients outside the EU.

I would suggest solving this issue by applying the reasoning that Articles 16 and 26 of the EU VAT Directive were introduced to ensure that the business that deducted the VAT on the purchase of the items should be treated the same as a consumer buying the same items in the same jurisdiction. This means that VAT has to be adjusted or paid in the country of deduction, implying that the 0% VAT rate cannot be applied as this would not lead to the envisaged adjustment. Therefore, based on the purpose of the relevant EU VAT rules, the VAT exemption with credit should not apply to these transactions. This would also lead to the same result as disallowing the VAT deduction on the purchase of these goods, which was suggested by the EU VAT legislator as an alternative method for achieving the same goal, see Section 6.2.