Withdrawing or giving away goods: § 3(1b) UStG

A cabinetmaker builds a dining table in her workshop; wood, fittings and her journeyman's hours cost €2,000 in all. Instead of selling it, she puts it in her own dining room. No customer, no invoice, no money — and yet she owes the tax office €380 in VAT, 19 percent of her production cost.

VAT without a customer and without payment

The basic rule of German VAT is § 1(1) no. 1 UStG. It covers supplies of goods and services that a trader carries out in Germany for consideration within the scope of his business. Consideration is not a detail but a condition. Under that provision alone, someone who receives nothing would have nothing to tax.

This is exactly where two subsections of § 3 step in. Subsection 1b treats certain transactions as a supply of goods for consideration, subsection 9a does the same for services. The Act thus handles a transaction as if it had been paid for, although economically nobody paid anything.

This module deals with goods that leave the business for good: stock the owner takes home, a present for the workforce, a donation in kind to the local sports club. The second module covers the use of business assets and services provided free of charge.

Why the effort? The answer lies in input-tax deduction. A trader who buys goods for his business gets the VAT they contain back from the tax office. The system expects that tax to be charged again on the sale, this time to the customer who actually consumes the goods.

If the goods leave the business without a sale, that second half is missing. The owner would consume privately what he bought free of VAT, and would be better off than any consumer paying for the same item in a shop. The deemed supply closes this gap by taxing the final consumption after the event.

The collective name unentgeltliche Wertabgabe, a free transfer of value, has taken hold for these transactions. The Act uses it itself, for instance in § 15a(3) UStG. The term describes aptly what happens: value leaves the business, and nothing comes back that could be called a return.

Because the transaction is treated as a supply for consideration, the rates of § 12 UStG apply to it too. The standard rate is 19 percent of the taxable amount. Anyone withdrawing goods covered by the reduced rate, such as foodstuffs listed in Annex 2, applies seven percent; the course on VAT rates explains the dividing line.

Free of charge in these provisions means entirely without anything in return. If the recipient pays a price, however low, there is an ordinary supply for consideration. For such discounted supplies to related persons and to staff, § 10(5) has a rule of its own, dealt with in the second module.

Three cases: withdrawal, gifts to staff, other gifts

§ 3(1b) first sentence UStG lists three transactions. Number 1 concerns withdrawal: the trader takes goods out of his business for purposes lying outside it. This is the classic case of the owner who takes stock from the warehouse for his own household.

Withdrawal is not limited to trading stock. A fixed asset is caught as well when it moves permanently into the private sphere: the office laptop the owner keeps for his children after a replacement, or the company vehicle he transfers entirely to private property instead of selling it.

Withdrawal presupposes a business from which the trader himself can take something. In a sole proprietorship that is the owner; in a partnership the partnership acts as the trader. If a company gives something to its partners free of charge, number 3 is examined, and for discounted supplies § 10(5).

Number 2 covers giving goods free of charge to one's own staff for their private needs. Small courtesies, Aufmerksamkeiten, are excluded. The hamper for a service anniversary, a bicycle as a bonus or a television from the own range as a Christmas present are typical cases.

The VAT Act itself does not define a small courtesy and names no amount for it. Going by the ordinary meaning of the word, it refers to small gifts customary between people on personal occasions. This course states no fixed limit, because none appears in the text of the law.

The words private needs matter just as much. What an employer provides so that staff can do their work serves the business, not private life. Tools, protective clothing or a work phone used only for business are therefore not a gift within number 2.

Number 3 is a catch-all. It covers any other free transfer of goods, above all gifts to customers and business friends, but also donations in kind to associations or charities. Whether the recipient is a trader or a private person makes no difference to the rule.

Number 3 names two exceptions expressly: gifts of small value and samples for the purposes of the business. The sample a manufacturer hands out to retailers so they can test the product therefore stays untaxed. It is not consumed to reward someone, but to make a sale.

The condition: input-tax deduction on acquisition

§ 3(1b) second sentence UStG sets one condition common to all three numbers. The deemed supply applies only if the goods or their components gave a full or partial right to deduct input tax. This sentence is the bridge between purchase and output: only what was relieved before is taxed now.

A used car bought by a trader from a private seller illustrates the consequence. There was no invoice showing VAT, and no input tax was deducted. If he later moves the vehicle into his private property, the second sentence means there is no taxable withdrawal.

Things change if components were later built into that vehicle for which input tax was deducted, such as a new engine fitted by a garage. The condition is then met through the components. How the taxable amount is then limited to the component is not stated expressly in the wording of the law.

The word partial carries weight too. Goods that on purchase gave only a partial right to deduct, because they were also used for transactions excluding deduction, still meet the condition. It is enough that any input tax was deducted at all; full relief is not required.

By contrast, a trader who carries out only transactions excluding input-tax deduction gets nothing back on purchase. For him the withdrawal logically remains free of VAT, because there is nothing to balance. The VAT he paid on purchase is already a cost to him and stays one.

This condition is linked to the input-tax adjustment: § 15a(3) third sentence UStG catches withdrawals without a taxable deemed supply, for example of built-in components, and subsection 8 a supply under § 3(1b) judged differently from the original use. The course on input-tax adjustment shows the calculation.

Business gifts and the €50 limit

Two statutes meet when gifts go to business friends. For income tax, § 4(5) first sentence no. 1 EStG bars expenses for gifts to persons who are not employees of the giver from reducing profit. This does not apply if the acquisition costs per recipient and financial year do not exceed 50 euros.

The VAT Act builds on this. § 15(1a) UStG excludes input-tax deduction for expenses caught by that income-tax ban. How this link works in detail and how the 50 euros are added up is explained in the course on company cars, gifts and staff events.

For the deemed supply, a clear sequence follows. If the gifts to one recipient in a year exceed the limit, input tax is excluded. The condition of § 3(1b) second sentence is then missing, and the gift is not a taxable supply. The VAT paid on purchase stays with the giver for good.

If the gifts stay within the limit, input tax is deductible and the condition of the second sentence is met. Whether a deemed supply under number 3 then arises depends on the exception for gifts of small value. The VAT Act contains no euro amount for that exception.

The 50 euros of the Income Tax Act therefore cannot simply be equated with small value, even though both rules aim at the same present. One decides on deducting the business expense and thus on input tax, the other on whether the gift is taxable. Anyone wishing to apply an administrative limit should look it up in the official guidance.

Gifts to one's own staff are not caught by § 4(5) first sentence no. 1 EStG, since that provision concerns only persons who are not employees. For the workforce, number 2 of § 3(1b) with its exception for small courtesies applies instead of the gift limit. The payroll side is covered in the course on tax-free employer benefits.

The taxable amount: purchase price or cost at the time of the transfer

Without consideration, the usual taxable amount is missing, since § 10(1) UStG measures the supply by what the recipient spends. § 10(4) no. 1 UStG fills the gap. For supplies within § 3(1b), the measure is the purchase price plus incidental costs, for the goods themselves or for similar goods.

Timing is decisive. The Act refers expressly to the time of the supply, meaning the moment of withdrawal or gift. What the trader paid years ago does not count. The question is what he would have to spend to buy the same or similar goods now.

An example: a notebook was bought two years ago for 1,500 euros net. When the owner retires from the business he takes it home. Similar used devices now trade for 600 euros net. The taxable amount is 600 euros, and the VAT comes to 114 euros.

Conversely, the timing does not protect against price rises. If a retailer bought goods cheaply and the purchase price has since gone up, the higher current price applies. Incidental costs are included, meaning what would be incurred on purchase in addition to the price of the goods, such as freight or packaging.

The selling price, on the other hand, plays no part. An electronics retailer who takes a television from his own range for his living room taxes not the shop price but the purchase price. The trading margin he would have earned on a sale to a customer is not taxed on withdrawal, because it was never earned.

Where there is no purchase price because the goods were made in-house, production cost takes its place, again at the time of the supply. It includes everything the manufacture cost: materials, wages, a share of machine costs. This is the case of the cabinetmaker from the introduction.

Production cost is not limited to costs on which input tax was deducted. The journeyman's wage contains no VAT and is still included. This is why the tax on a withdrawal can exceed the input tax deducted on the materials; in the opening case, 380 euros face a much smaller input tax on materials.

Under the last sentence of § 10(4), VAT itself is not part of the taxable amount. The purchase price is therefore taken net, and the tax is calculated on top of this net figure, not extracted from it. Working with gross prices means taxing the VAT a second time by mistake.

When the tax arises and where it is reported

For deemed supplies, § 13(1) no. 2 UStG has a rule of its own. The tax arises at the end of the return period in which the supply was carried out. A withdrawal in March belongs in the return for March or for the first quarter, depending on which period applies to the business.

There is no payment to link to. For the deemed supply it therefore does not matter whether the business taxes its other supplies on agreed or on received consideration. The general rules on when tax arises are explained in the course on accrual taxation, advance payments and vouchers.

No invoice is issued for a withdrawal; a trader cannot invoice himself. Records matter all the more. § 22(2) no. 3 UStG requires the taxable amount for supplies within § 3(1b) to be apparent from the records, broken down by tax rate.

In practice this means an internal voucher for each transaction: date, goods, recipient, the basis chosen and its amount. Where the purchase price is used, evidence belongs with it, such as a current supplier quotation. For production cost, keep the costing showing materials, working time and overheads.

In the advance VAT return, deemed supplies appear among the taxable supplies at the relevant rate, alongside ordinary sales. They increase the tax owed without any incoming payment to match. That is worth bearing in mind when planning cash for a month with large withdrawals.