Free Products for Military Hospitals: When a Tax Invoice Is Not Required
Ukrainian enterprises are increasingly supporting hospitals that assist the military by providing food and other goods free of charge. However, such charity raises practical questions: whether VAT arises, whether a tax invoice needs to be registered, and how to reflect the transaction in the profit tax declaration.
The State Tax Service (STS) in a new individual tax consultation explained in detail how tax rules apply to such transactions.
When a free transfer is not considered a supply
The basis for the inquiry was a question from a company that monthly transfers bakery products to a municipal non-profit enterprise as sponsorship assistance. These products are then used to supply servicemen of the Armed Forces of Ukraine.
The company asked the STS to clarify several aspects at once: whether such a transfer is considered a supply of goods, whether VAT should be charged, when tax liabilities arise, whether a tax invoice must be issued, and how to correctly reflect the transaction in the profit tax declaration.
The legal basis for VAT taxation is established by Section V and Subsection 2 of Section XX of the Tax Code of Ukraine (TCU). It is important to distinguish that the supply of goods means any transfer of the right to dispose of goods as an owner, including sale, exchange, or donation of such goods, as well as supply of goods by court decision (subparagraph 14.1.191 of paragraph 14.1 of Article 14 of Section I of the TCU).
Sale (realization) of goods means any operations carried out under contracts of sale, barter, supply, and other commercial or civil-law contracts that provide for the transfer of ownership rights to such goods for payment or compensation regardless of the timing of its provision, as well as operations involving free provision of goods (subparagraph 14.1.202 of paragraph 14.1 of Article 14 of Section I of the TCU).
The Tax Code defines that generally a free transfer of goods is equated to a supply operation. However, during martial law, the legislation provides a special exception. This refers to paragraph 32-1 of subsection 2 of Section XX of the Tax Code, according to which operations involving free transfer of goods to certain state bodies, military formations, as well as healthcare institutions of state and communal ownership are not considered supplies. This provision allows businesses to transfer necessary goods without VAT tax consequences.
No VAT arises if the established conditions are met. The STS emphasized that the decisive factor is not only the fact of free transfer but also the status of the recipient. If goods are transferred without any compensation to a healthcare institution of state or communal ownership or another entity directly specified in paragraph 32-1 of subsection 2 of Section XX of the TCU, such a transaction is not recognized as a supply of goods for VAT purposes.
In this case, the enterprise does not have to recognize VAT tax liabilities. At the same time, the STS stressed that the exception does not apply only when the respective operation is taxed at a zero tax rate.
No need to issue a tax invoice
Since such a transfer is not considered a supply, the obligation to issue a tax invoice also does not arise. If an enterprise transfers products free of charge to healthcare institutions of state or communal ownership, no tax invoice is issued for such a transaction.
Effectively, this means that the seller does not incur any VAT liabilities related to such a transfer.
What about profit tax?
The general rule of the Tax Code provides for an increase in the financial result in case of free transfer of goods to non-profit organizations. However, during martial law, a special provision applies – subparagraph 69.6 of subsection 10 of Section XX of the TCU. It allows not to apply the relevant adjustment if goods are transferred free of charge to entities specified by law, including healthcare institutions of state or communal ownership for defense needs.
Thus, if the requirements of this provision are met, the enterprise does not need to increase the financial result for taxation purposes.
How to reflect the transfer in reporting
Despite the absence of VAT tax liabilities, the transaction itself must be reflected in the profit tax reporting. The STS explained that information about freely transferred goods must be indicated in Appendix BD to the profit tax declaration.
In particular, for operations falling under subparagraph 69.6 of the TCU, Table 6 of this appendix is used. It specifies: the name of the aid recipient, EDRPOU code, non-profit status indicator, and the value of freely transferred goods.
The value is determined according to accounting rules.
Practical significance of the clarification
The individual consultation concerns a specific taxpayer but demonstrates the STS approach to similar operations. For enterprises supporting hospitals, military hospitals, or other institutions specified by law with food, medicines, or other goods, this position is important.
Thus, if the conditions established by law are met, such assistance does not create additional VAT burden and does not lead to profit tax adjustments, although there remains an obligation to properly document and declare the respective transactions.
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