In the performance of the activity of stock-holding companies, they may encounter situations in which these are either destroyed or intended to be destroyed. In the following, we summarize the aspects to be considered regarding those situations involving goods destroyed / undergoing destruction.

Legal Provisions

From the perspective of corporate tax

According to the provisions of Article 25, paragraph (4), section c) of the Tax Code, in general, expenditures with goods such as stocks found missing in the inventories or degraded (including related VAT, if applicable) are considered non-deductible expenses in the calculation of the tax result.

However, in certain circumstances provided for by law, such expenses may be considered deductible in the calculation of taxable profit as follows:

„1. goods destroyed as a result of natural disasters or other causes of force majeure under the conditions laid down by the rules;
2. the goods for which insurance contracts have been concluded;
3. qualitatively degraded goods if proof of destruction is provided;
4. food intended for human consumption with a close-to-expiration date, other than those in the situations / conditions referred to in sections 1 and 2, if their transfer is made in accordance with the legal provisions on the reduction of food waste;
5. animal by-products not destined for human consumption other than those in the situations / conditions set out in sections 1 to 3 if their disposal is carried out in accordance with the legal provisions on the reduction of food waste;
6. agro-alimentary products that have become unfit for human or animal consumption if the targeting / management is aimed at transforming them into compost / biogas or neutralizing them, according to the legal provisions on the reduction of food waste;
7. goods other than those in the situations / conditions set out in sections 1-6, if the term of validity / expiry is exceeded, according to the law”.

From the perspective of value added tax

According to the provisions of Article 304, paragraph (2), section a) of the Tax Code, we note that the initial deduction of the tax is not adjusted for „goods destroyed, lost or stolen, provided that these situations are proved or duly confirmed by the taxable person”.

We also mention that the Methodological Rules state that among the situations in which the provisions of Article 304, paragraph (2), section a) of the Tax Code these include „goods of the nature of qualitatively degraded stocks, which cannot be redeemed and for which evidence of destruction is proved”.

Practical aspects

A good example is that of a company selling cosmetics and accessories and which decided that the three-year-old goods will be destroyed. The merchandise consists of hard-to-sell accessories and expired cosmetics, and insurance contracts have been concluded for these goods.

In order to establish the correct tax treatment, we will resume the seven cases mentioned above and test their applicability in our example:

1. oods destroyed as a result of natural disasters or other causes of force majeure under the conditions laid down by the rules – this is not the case with the company under consideration;

2. the assets for which insurance contracts have been concluded – these provisions are only applicable if the contracts cover the risk of lack of management or of degradation and the company may be entitled to compensation;

3. qualitatively degraded goods if evidence of destruction is proven – in this situation, the company must prove the qualitative degradation of the goods as well as evidence of destruction;

4. foods intended for human consumption with a near-expiry date of consumption other than those in the situations / conditions referred to in sections 1 and 2 if their transfer is carried out in accordance with the legal provisions on the reduction of food waste – not applicable;

5. animal by-products not destined for human consumption other than those in the situations / conditions set out in sections 1 to 3 if their disposal is carried out in accordance with the legal provisions on the reduction of food waste – not applicable;

6. agri-food products that have become unfit for human or animal consumption if the targeting / management is aimed at transforming them into compost / biogas or neutralizing them, according to the legal provisions on the reduction of food waste – not applicable;

7. goods other than those in the situations / conditions set out in sections 1-6, if the term of validity / expiry is exceeded, according to the law – his provision is applicable to cosmetics for which the expiry date has expired.

With regard to corporate tax, in the context of the foregoing with regard to hard-to-sell accessories, if they are not degraded, the related expense is not deductible according to the general provision. If it can be considered to be degraded qualitatively and this state can be demonstrated, the related expense can be considered deductible in the calculation of the corporate tax.

From the perspective of expired cosmetics, as it results from the above provisions, the related expense is deductible if it is demonstrated that, according to the law, the term of validity is exceeded.

Similarly, from the point of view of value added tax, if the company has sufficient supporting documents to prove that the goods are degraded in a qualitative manner, and that they have been destroyed, then it is not required to adjust the initial deduction of VAT. In the case of hard-to-sell accessories, if they are not considered to be degraded qualitatively, the VAT will be adjusted while, in the case of cosmetics, they are considered to be degraded qualitatively in the cotext of expiration of the period of validity and thus the related VAT will not be adjusted. For all situations where VAT is not adjusted, proof of destruction must be provided.

In conclusion, when deciding on the destruction of goods, each situation needs to be analyzed in order to apply the correct tax regime.
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