Supplies made free of charge and input VAT deduction – BMF circular letter dated 24 January 2024

The German Federal Ministry of Finance (BMF) aligns with the case law of the ECJ and the German Federal Fiscal Court (BFH): In certain cases, purchases that are only indirectly related to taxed output transactions are also eligible for an input VAT deduction.


According to the previous BFH case law, there had to be a direct and immediate connection between the input and output supply for an input VAT deduction to be permitted. However, due to the ECJ decision "Mitteldeutsche Hartsteinindustrie" (judgement of 16 September 2020, C-528/19), the BFH changed its case law. In this particular case, the plaintiff had received authorisation from the city to operate a limestone quarry - on the condition that it would extend a municipal road at its own expense to accommodate the corresponding traffic of heavy goods.  The road was also available to the public after the extension.

Because those extension works did not exceed what was necessary to allow the plaintiff to carry out its economic activity and the costs of those works were included in the price of the output transactions carried out, the plaintiff was entitled to deduct input VAT from the input supplies. The fact that the general public could also use the road free of charge was irrelevant because the upgrade work was not for the benefit of the general public (who already used the road before the upgrade), but to adapt the road to the needs of the limestone quarry.

There was also no free-of-charge supply by the plaintiff, as the development work was done to accommodate the heavy goods traffic of the limestone quarry and the benefit to the general public was ancillary. Therefore, there was no untaxed final consumption of the input supplies, which is, however, a prerequisite for a free-of-charge supply if interpreted in accordance with EU law.

The BFH agreed with the ECJ's ruling and expressly abandoned its previous case law to the contrary (ruling of 6 December 2020, XI R 26/20).

BMF circular letter

The BMF amends the administrative guidelines (UStAE) to the German VAT Code (UStG) accordingly, closely following the facts of the case law. The new section 15.2b para. 2 stipulates, with regard to input VAT deduction, that an immediate link between the input supply and a taxed output supply is generally required. Exceptions to this requirement are only made if the input supply meets all the following conditions:

  • The input supply is to be passed on to a third party free of charge and
  • at the same time enables the company to pursue its own entrepreneurial activities.
  • The purchased input supply does not exceed what is necessary or indispensable to fulfil this purpose.
  • The costs of the input supply are part of the price of the output supplies.
  • The advantage to the third party is ancillary.

To avoid any misunderstanding, the BMF once again expressly stated that only if all these conditions are met is an indirect link sufficient for an input VAT deduction. The BMF thus pre-emptively stifles any further interpretations of the ECJ judgement "Mitteldeutsche Hartsteinindustrie" by specifically stating that such a purchase is not necessary or indispensable simply because it is based solely on the fulfilment of a legal obligation (such as a condition made by the authorities). If the expenses go beyond what is necessary and/or indispensable, a partial input VAT deduction is possible. 

With regard to the scope of the free-of-charge supply, the BMF has added paragraph 4 to sec. 3.2 UStAE that states that sec. 3 para. 1b and 9a UStG are to be interpreted restrictively in conformity with EU law to the effect that a free-of-charge supply is not taxable if there is no risk of untaxed final consumption. This is followed by a firm clarification that closely aligns with case law and a negative delimitation.

The letter’s principles are to be applied to all open cases.

Practical implications

It is incomprehensible that an official condition of the authorities should not be considered a necessity or indispensability for the company.

The ECJ ruling "Mitteldeutsche Hartsteinindustrie" does not indicate that the economic benefit to the general public must be ancillary. Rather, this conclusion was only drawn by the BFH in its subsequent ruling, referring to the ECJ ruling "Vos Aannemingen" (C-405/19, 1 October 2020). There, however, the ECJ had made it very clear that the benefits of third parties only do not affect the input VAT deduction under this condition. This additional condition is problematic for entrepreneurs who conduct development activities, as development activities may not entitle them to deduct input VAT despite their indispensability if the general public enjoys a greater benefit. How a benefit to the general public is to be judged is likely to become a contentious issue in the future.

While the ECJ had ruled in the "Mitteldeutsche Hartsteinindustrie" case that there was a direct and immediate link between the development expenses and the taxed output supplies, the BFH described the link as only indirect in its subsequent judgement.  It even expressly abandoned its previous case law, according to which a merely indirect connection was not sufficient for an input VAT deduction. This had prompted consideration as to whether the conditions for input VAT deduction could generally be handled more loosely in the future and whether indirect objectives could also be taken into account. In its letter, the BMF (as the BFH) classifies the connection as only indirect but does accept extending the input VAT deduction to other cases involving an only indirect connection between the expenses and taxed output transactions.

With regard to the free-of-charge supply, it must also be carefully examined whether the benefit to the recipient is ancillary because only then is there no untaxed final consumption, meaning that the free-of-charge supply does not apply. For this reason, the BMF is sticking to its letter of 7 June 2012 on development costs, as the cases described there result in untaxed final consumption.  Going forward, the letter can be used for differentiation purposes.


Nadia Schulte
+49 211 83 99 330