France: VAT incurred on goods acquired by a taxable person remains deductible even when such goods are provided free of charge to third parties
Input VAT deduction and VAT neutrality
With regard to the right of deduction, the main principle is the allocation of the purchase. VAT incurred on goods or service is deductible only if that expenditure is used to carry out transactions that give rise to a taxable activity.
This mechanism reflects one of the main EU principle, i.e. VAT neutrality, while ensuring a direct and immediate link between purchase and sale.
This decision reinforces the principle that the right to deduct VAT depends primarily on the existence of a direct and immediate link between the input transaction and the taxpayer’s taxable economic activities, rather than on whether the goods themselves are ultimately supplied for consideration.
Recently, the French Supreme Administrative Court (Conseil d’État) has confirmed that VAT incurred on the purchase of goods may remain deductible even where those goods are subsequently distributed free of charge to third parties, provided that the costs incurred are directly linked to overall taxable transactions carried out by the taxable person.
Facts
In its decision of 7 July 2026 (Conseil d’État, No. 504974), the Court considered a case involving a taxpayer engaged in the energy efficiency sector. The taxpayer purchased light bulbs and provided them free of charge to social housing providers in order to encourage energy saving measures. These distributions formed part of a standardized scheme allowing the taxpayer to obtain energy savings certificates, which were subsequently sold as part of transactions subject to VAT.
The tax authorities challenged the taxpayer’s right to deduct the VAT incurred on the purchase of the light bulbs, arguing that the goods had been supplied without consideration. However, the Court held that the VAT remained deductible where the related expenses constituted a component of the cost base of the taxpayer’s taxable activities and where there was a direct and immediate link between those expenses and the taxable outputs generating a right to deduction.
The Court emphasized that, according to established case law of the Court of Justice of the European Union (CJEU), the fact that goods are provided free of charge does not, in itself, preclude the recovery of input VAT. The relevant criteria is whether the expenditure forms part of elements constituting the price of taxable transactions carried out by the taxpayer and therefore bears a direct and immediate connection to those transactions.
Applying these principles, the Court found that the free distribution of the light bulbs was not an end in itself. Rather, it represented a necessary step in the process for obtaining Energy Savings Certificates, whose subsequent sale constituted a taxable activity.
Consequently, the Court concluded that the free provision of the light bulbs was made in exchange for the acquisition of Energy Savings Certificates and that the subsequent sale of those certificates was subject to VAT. Therefore, the input VAT incurred on the purchase of the goods was deductible.
Key takeaway for business
VAT incurred on goods distributed free of charge may still be recoverable where the distribution serves a business purpose and the related costs are incorporated into the price of subsequent taxable transactions. The decision provides clarification for businesses operating incentive, promotional, or energy-efficiency schemes involving the free provision of goods as part of a broader VATable activity.
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