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In which cases is VAT not calculated for a vehicle?
In which cases is VAT not calculated for a vehicle?
In recent periods, we have often seen that many taxpayers donate or transfer the vehicles recorded on their balance sheets to certain government institutions free of charge. One of the most important issues in such transactions is whether the value-added tax (VAT) previously credited during the acquisition of the vehicles must be restored. Altay Jafarov provides clarification on this matter.
According to Article 160.4 of the Tax Code, the gratuitous transfer of movable and immovable property, intangible assets, as well as enterprises as a property complex by legal entities and individuals to state authorities (institutions), as well as to funds created for public and social purposes and approved by the relevant executive authority, is not considered a taxable transaction.
Example: Suppose that “XX” LLC acquired a vehicle in January 2025 for 59,000 manats, consisting of a 50,000-manat principal amount and 9,000 manats of VAT. In accordance with the requirements of the Tax Code, the company made the payments and credited the 9,000 manats of VAT. In November, the company’s management (founders) decided to donate the vehicle to a state authority, meaning to transfer it free of charge. Note that the LLC calculated 10,400 manats of depreciation for the vehicle for the period January–October, and as of 01.11.2025 its residual value amounted to 39,600 manats.
Also, “XX” LLC had previously acquired another vehicle worth 47,200 manats, consisting of a 40,000-manat principal amount and 7,200 manats of VAT. The company, considering the requirements of the Tax Code, made the payments and credited the 7,200 manats of VAT. As of 01.11.2025, the vehicle’s residual value was 30,000 manats. The LLC decided to engage in passenger transportation activities. In this case, the company intends to use the vehicle valued at 30,000 manats for passenger transportation.
Should “XX” LLC calculate VAT for these transactions?
According to Article 160.4 of the Tax Code, the vehicle transferred free of charge by the LLC to a state authority is not considered a VAT-taxable transaction, and the company must report the residual value — 39,600 manats — in line 331 of Annex 3 of the VAT return for November.
Now let us consider the second part of the issue.
Article 175.6 of the Tax Code states that, except for the case specified in Article 160.4, when a person engages in VAT-exempt or non-VAT-taxable transactions, the VAT paid for the purchase of goods (works, services) for such transactions is not creditable. When goods (works, services) are purchased using funds allocated from the state budget (except subsidies and repayable funds), the VAT paid is also not creditable.
According to Article 175.6, the VAT on goods, works, and services purchased for VAT-taxable transactions is creditable except for the transactions covered by Article 160.4. That is, the VAT related to transactions listed under Article 160.4 that are not subject to VAT may be credited.
Therefore, in the second case, the LLC must record the VAT amount corresponding to the residual value of the vehicle — 30,000 manats — in line 324 of the November VAT return. This means that 5,400 manats of VAT must be restored:
30,000 × 18% = 5,400 manats.
The principal amount of 30,000 manats is not reflected anywhere in the return.
Since passenger transportation is a VAT-exempt activity, the VAT previously credited must be restored for this transaction. As the residual value of the vehicle is 30,000 manats as of 01.11.2025, the VAT amount on this value must be restored in accordance with Article 175.6.
However, the VAT amount related to the vehicle valued at 39,600 manats, which was transferred free of charge to a state institution, is not subject to restoration.
In recent periods, we have often seen that many taxpayers donate or transfer the vehicles recorded on their balance sheets to certain government institutions free of charge. One of the most important issues in such transactions is whether the value-added tax (VAT) previously credited during the acquisition of the vehicles must be restored. Altay Jafarov provides clarification on this matter.
According to Article 160.4 of the Tax Code, the gratuitous transfer of movable and immovable property, intangible assets, as well as enterprises as a property complex by legal entities and individuals to state authorities (institutions), as well as to funds created for public and social purposes and approved by the relevant executive authority, is not considered a taxable transaction.
Example: Suppose that “XX” LLC acquired a vehicle in January 2025 for 59,000 manats, consisting of a 50,000-manat principal amount and 9,000 manats of VAT. In accordance with the requirements of the Tax Code, the company made the payments and credited the 9,000 manats of VAT. In November, the company’s management (founders) decided to donate the vehicle to a state authority, meaning to transfer it free of charge. Note that the LLC calculated 10,400 manats of depreciation for the vehicle for the period January–October, and as of 01.11.2025 its residual value amounted to 39,600 manats.
Also, “XX” LLC had previously acquired another vehicle worth 47,200 manats, consisting of a 40,000-manat principal amount and 7,200 manats of VAT. The company, considering the requirements of the Tax Code, made the payments and credited the 7,200 manats of VAT. As of 01.11.2025, the vehicle’s residual value was 30,000 manats. The LLC decided to engage in passenger transportation activities. In this case, the company intends to use the vehicle valued at 30,000 manats for passenger transportation.
Should “XX” LLC calculate VAT for these transactions?
According to Article 160.4 of the Tax Code, the vehicle transferred free of charge by the LLC to a state authority is not considered a VAT-taxable transaction, and the company must report the residual value — 39,600 manats — in line 331 of Annex 3 of the VAT return for November.
Now let us consider the second part of the issue.
Article 175.6 of the Tax Code states that, except for the case specified in Article 160.4, when a person engages in VAT-exempt or non-VAT-taxable transactions, the VAT paid for the purchase of goods (works, services) for such transactions is not creditable. When goods (works, services) are purchased using funds allocated from the state budget (except subsidies and repayable funds), the VAT paid is also not creditable.
According to Article 175.6, the VAT on goods, works, and services purchased for VAT-taxable transactions is creditable except for the transactions covered by Article 160.4. That is, the VAT related to transactions listed under Article 160.4 that are not subject to VAT may be credited.
Therefore, in the second case, the LLC must record the VAT amount corresponding to the residual value of the vehicle — 30,000 manats — in line 324 of the November VAT return. This means that 5,400 manats of VAT must be restored:
30,000 × 18% = 5,400 manats.
The principal amount of 30,000 manats is not reflected anywhere in the return.
Since passenger transportation is a VAT-exempt activity, the VAT previously credited must be restored for this transaction. As the residual value of the vehicle is 30,000 manats as of 01.11.2025, the VAT amount on this value must be restored in accordance with Article 175.6.
However, the VAT amount related to the vehicle valued at 39,600 manats, which was transferred free of charge to a state institution, is not subject to restoration.