Is VAT due when goods or services are provided free of charge?

Aiki Kuldkepp
woman carrying boxes
Businesses usually provide goods or services against a payment. However, it sometimes happens that they do things free of charge, for example, to promote their sales or motivate their employees. The Court of Justice of the European Union (ECJ) has lately explained how VAT applies to such free supplies of goods or services. This article looks at the VAT aspects of giving goods away free of charge to promote the activities of a business.


Giving away goods for free with certain purchases may entice customers to buy certain products or to buy more products. As a promotional activity, goods or services can be given away for free if customers buy certain products or spend a certain amount of money. 

In cases of promotional schemes it is necessary to analyze whether any adjustments are due on the input VAT deduction or, alternatively, any VAT becomes payable on fictive supplies when the goods or services are provided free of charge.   

Not only are EU VAT rules around promotional schemes implemented differently by the EU Member States (MSs), tax authorities of MSs also differ in their approach to how promotional giveaways should be treated for VAT purposes.  

Therefore, the recent ECJ decision in Case C-505/22 (Deco Proteste – Editores) is very welcome. It provides a solid basis to appeal against practices and VAT laws of the Member States that are not in line with EU VAT principles. 


A Portuguese company Deco Proteste – Editores (‘Deco’) publishes periodicals that are sold only for subscription. Deco offers gifts to new subscribers as part of its promotional campaign aimed at attracting new customers. It gives new subscribers who sign up for a subscription plan a gift which can be a tablet or smartphone, the value of which is always below EUR 50. The subscription gift is sent by courier to those subscribers with their magazine after the first monthly subscription payment, the amount of which is identical to that of subsequent monthly payments. As there is no minimum subscription period, customers may keep the subscription gift without incurring any penalty, after the first monthly payment, even if the subscription is cancelled. 

The invoices issued by Deco refer to the subscription of the magazine (no reference to the supply of gifts), and a 6% VAT reduced rate is applied. 

The Portuguese tax authorities (PTA) considered that the subscription gifts are free supplies of goods falling under Article 16 of the EU VAT Directive which provides that VAT should be charged on the disposal of business assets free of charge or, more generally, their application for purposes other than those of business. The PTA consequently subjected the supply of the gifts to VAT, using their purchase price as the taxable basis and the standard rate of 23% as the VAT rate. 

Deco lodged an appeal that the provision of subscription gifts to new subscribers did not constitute a form of “giving, in the absence of an intention to act free of charge”. Deco argued that this was a commercial offer consisting of the provision of a service, namely the subscription, linked to a supply of goods, namely the subscription gift, with a financial consideration included in the value of the magazine subscription.  


The referring court had doubts about how to categorize the supply of gifts and how to interpret the concept of "gift of small value" for the purposes of the EU VAT Directive 2006/112/EC. Therefore, it decided to refer to the ECJ the following question: 

“Where new subscribers are given a gift (a 'gadget') when they subscribe to periodicals, must the making of that gift be considered, for the purposes of Article 16 of the VAT Directive, to be: 

  1. a supply of goods made free of charge, separate from the transaction consisting of subscribing to the periodicals, or 
  2. part of a single transaction for consideration, or 
  3. part of a commercial package, comprising a principal transaction (the subscription to the magazine) and an ancillary transaction (making the gift), in which the ancillary transaction is considered to be a supply for consideration instrumental to the subscription to the magazine?” 

Furthermore, the referring court asked how the EU VAT rules for gifts of small value should be implemented. However, since these questions were only relevant if the gift should be considered as a supply of goods made free of charge (option 1 above), the ECJ did not find it necessary to answer those questions (i.e., the ECJ did not find that the goods were free supplies, see more details below). 


The ECJ found that tablets or smartphones transferred to new subscribers should not be seen as supplied free of charge. The ECJ decided that delivering a gift as part of subscribing to magazines was a supply incidental to the main supply of periodicals.  

The ECJ consequently decided that these gifts were ancillary to the main supply of subscriptions, falling within the scope of “paid supply of goods”. The gifts would consequently not be subject to VAT separately, since the VAT treatment applicable to the periodical was applicable to them. 

Other judgements 

In another recent case C-607/20 (GE Aircraft Engine Services), the ECJ looked at an employee recognition program whereby high-performing employees could be awarded retail vouchers free of charge. The referring court asked whether the vouchers should be subject to VAT on the basis of Article 26(1)(b) of the EU VAT Directive which provides that the VAT is charged on the supply of services carried out free of charge by an entrepreneur for his private use or for that of his staff or, more generally, for purposes other than those of his business.  

The ECJ decided that providing free vouchers was not subject to VAT because the private advantage gained by the employees was found to be incidental to the interests of the business. The ECJ held that because the program was intended to increase the performance of employees, it must be found that the supply of services was not carried out for purposes other than those of the business and, therefore, did not fall within the scope of Article 26(1)(b) of the VAT Directive. 

What are the Practical Consequences? 

As already mentioned above, the MSs apply the VAT rules in different ways on loyalty schemes, giveaways and other promotional schemes. Some MSs apply a very formalistic approach with respect to promotional giveaways and see them as goods supplied free of charge and subject to VAT separately. 

Recent ECJ rulings may have a positive impact on these practices of the Member States. They provide solid arguments for applying VAT rules in favor of VAT payers and against the tax authorities’ formalistic approach. 

Businesses are advised to reconsider the VAT implications of their promotional / loyalty programs. 

However, every case is different, and the facts and circumstances of various promotional schemes should be analyzed on a case-by-case basis in light of the recent ECJ case law.