Equitable regulations for donations in kind relieve companies

4 years ago

Finance & Accounting

Many companies are committed to the good cause with donations in kind. For example, during the Corona pandemic, many goods, clothing and food were donated to those in need. In July 2021, a flood disaster caused enormous economic damage in parts of Germany. Here, too, many companies are showing solidarity and are making premises available as living space for flood victims or donating urgently needed items. But what does a donation in kind mean for accounting? What needs to be considered under VAT law? Current (temporary) equitable regulations provide companies with considerable financial relief.

VAT assessment of donations in kind

The Corona pandemic and lockdown measures ensured full storage facilities for many companies. Many goods (especially seasonal goods) could not be sold due to closed shops. The problem: What should be done with these goods? As a rule, the companies have already paid for the goods and claimed input VAT deduction from the purchase. In order not to simply dispose of the goods, more and more companies are deciding to donate goods to tax-privileged organizations. For accounting, however, the question then arises: What happens to VAT?

Gratuitous ad valorem transfers

Sales tax is an end consumer tax. Normally, gratuitous ad valorem transfers are therefore subject to VAT (sec. 3 para. 1b of the German VAT Act). According to sec. 10 para. 4 of the German VAT Act, the basis of assessment is generally the purchase price at the time of the donation. The companies that want to make a donation in kind would therefore actually have to set an appropriate value for the fictitious purchase price and pay the VAT accordingly. Financially, however, this burden is then considerable. In a letter from the Federal Ministry of Finance, the tax authorities have clarified how the assessment basis is applied if the goods are no longer marketable or only marketable to a limited extent. In the case of worthless goods, even an estimate of 0 euros must be made.

Temporary waiver of taxation of gratuitous ad valorem transfers

The tax authorities have also reacted to the extraordinary situation caused by the Corona pandemic and have adopted an equitable regulation for retailers: If goods from retailers that are directly and not insignificantly negatively affected economically by the Corona crisis are donated to tax-privileged organisations or have already been donated, then the taxation of a gratuitous transfer of value will be waived. However, this equitable rule only applies to donations made between March 1, 2020 and December 31, 2021.

VAT relief in connection with the flood disaster

It is not only the corona crisis that has challenged many companies. The flood disaster in July 2021 also hit parts of Germany hard. Many companies have tried to help in times of need: For example, premises were quickly converted into emergency shelters, hotel rooms or holiday apartments were made available, personnel, equipment and materials were used to search for and rescue victims and many urgently needed items, such as clothing, blankets, towels and much more, were donated. Here, too, the tax authorities have taken various measures in a letter to relieve companies of VAT. For example:

Companies that were victims of the flood disaster can apply to reduce the special VAT advance payment (up to 0 euros).
Anyone who provides housing free of charge in connection with the flood disaster does not have to pay VAT for this free transfer of value until 31.12.2021. The tax authorities also waive an input VAT correction in accordance with sec. 15a of the German VAT Act. Companies can also continue to claim input VAT deduction for running costs, such as electricity, water, etc., in this context.
For certain donations in kind in the period from 15.7 to 31.10.2021, the taxation of free ad valorem transfers will be waived.

Accounting record-keeping obligations

Whether it’s the corona crisis or the flood disaster, the accounting department should make sure that it is easy and clear to see that the donations in kind were beneficiaries and make appropriate records. A legal obligation to do so arises from sec. 22 para. 2 of the German VAT Act. Only if the accounting documents correctly can the company benefit from the equitable regulations (legally secure). The VAT relief can have a significant financial impact. This makes it all the more important for companies to have the appropriate know-how when it comes to accounting. Only those who know the currently applicable equitable regulations in detail can apply them correctly.

In the course of the accounting service of ICS adminservice, the accounting processing of donations is professionally implemented by a team of experts. This allows customers to focus on doing good. Are you already using external support in finance and accounting or are you thinking about it? Feel free to talk to us.

Image Credit: Unsplash, Photographer: Aaron Doucett