The Tax Service May Equate the Write-Off of Equipment Destroyed by a Missile Strike to Its Sale: What Taxpayers Should Consider

The Tax Service clarified whether VAT should be charged when writing off equipment destroyed as a result of armed aggression. This concerns a situation where an enterprise used leased fixed assets that were fully depreciated and then destroyed due to hostilities.

In an individual tax consultation, tax authorities highlighted the circumstances under which the liquidation of such property is not equated to its supply for VAT purposes. At the same time, it is crucial for the enterprise to have documentary evidence that the equipment was destroyed specifically due to force majeure circumstances, and not liquidated by its own decision.

We analyze the rules applicable to destroyed fixed assets, when VAT tax liabilities arise, what documents the enterprise needs, and what changes full depreciation of the property brings.

When the write-off of a fixed asset is not considered its supply

The enterprise contacted the tax authorities due to the destruction of leased equipment as a result of armed aggression. The peculiarity of the situation was that on the date of destruction, the asset was already fully depreciated, and its residual value in accounting was zero.

The general rule of the Tax Code seems quite strict for the taxpayer. Subparagraph 14.1.191 of paragraph 14.1 of article 14 of the Tax Code classifies the liquidation of non-current assets by the taxpayer on their own initiative as a supply of goods. Therefore, under normal liquidation of a fixed asset, VAT consequences may arise.

Paragraph 189.9 of article 189 of the Tax Code provides that if fixed production or non-production assets are liquidated by the taxpayer’s own decision, such an operation for taxation purposes is considered a supply at usual prices, but not lower than the book value at the time of liquidation.

However, for war losses, the law establishes a fundamentally different approach. If a fixed asset is destroyed or damaged due to force majeure circumstances, such liquidation is not equated to ordinary supply. The same applies to other cases when liquidation occurs without the taxpayer’s consent, for example, in case of theft.

Thus, the key factor is the reason for the loss of property. If the enterprise decided to dispose of old equipment itself – that is one situation. But if the equipment was physically destroyed due to a missile strike, hostilities, or other force majeure circumstances – that is a completely different matter. This boundary must be properly documented.

The Tax Service explicitly emphasizes the necessity of documentary confirmation of the fact of property destruction and the circumstances that led to it. Tax authorities refer, in particular, to paragraph 44.1 of article 44 of the Tax Code, according to which tax reporting indicators must be based on documented data.

Separately, the individual tax consultation reminds about the need to conduct an inventory. According to article 10 of the Law of Ukraine “On Accounting and Financial Reporting in Ukraine,” enterprises conduct an inventory of assets and liabilities to ensure the reliability of accounting and financial reporting data. And according to the Regulation on the inventory of assets and liabilities approved by the Ministry of Finance order No. 879, inventory is mandatory, in particular, when facts of damage to valuables are established, as well as after man-made accidents, fires, or natural disasters.

Therefore, the algorithm for the enterprise actually starts not with accounting procedures but with collecting evidence.

What documents can confirm the destruction of property

The Tax Service refers to the General Tax Consultation approved by the Ministry of Finance order dated August 3, 2018, No. 673. It provides a list of documents that, depending on circumstances, can confirm the destruction or damage of a fixed asset. In particular, these include:

• a certificate from the Chamber of Commerce and Industry of Ukraine about force majeure circumstances;
• a report confirming the fact of fire;
• data or an extract from the relevant register on the termination of ownership rights to the fully destroyed fixed asset;
• an extract from the Unified Register of Pre-Trial Investigations – in case of theft;
• other documents that, according to legislation, confirm destruction, damage, or theft of property.

At the same time, the Tax Service separately emphasizes: to confirm force majeure circumstances, a certificate from the Chamber of Commerce and Industry of Ukraine or an authorized regional chamber may be used. The presence of proper confirmation allows distinguishing forced write-off of war-destroyed property from voluntary liquidation.

Is VAT required to be charged?

In the considered situation, the Tax Service’s answer is favorable for the taxpayer. If a fixed asset was damaged or destroyed due to force majeure circumstances, and the enterprise has proper confirming documents, the operation of its liquidation is not considered a supply for VAT purposes. Therefore, VAT tax liabilities on such write-off are not charged.

The Tax Service explicitly extends this conclusion to cases of destruction of fixed assets due to armed aggression. This also applies when the fixed asset was fully depreciated. It is important to understand here: a zero residual value by itself is not a reason for not charging VAT. The decisive factor is not how much the property costs according to accounting data, but why it was disposed of and whether the enterprise can document this.

For tax purposes, the key formulation is: the equipment was destroyed due to force majeure circumstances, and the enterprise has documents confirming this.

A separate question is whether the enterprise incurs VAT tax liabilities under paragraph 198.5 of article 198 of the Tax Code. The general rule is that the taxpayer must charge tax liabilities if goods, services, or non-current assets purchased with VAT begin to be used in non-taxable operations or in non-business activities. But war losses have separate regulation.

Paragraph 32-1 of subsection 2 of section XX of the Tax Code provides that during the period of martial law or emergency state, goods purchased in VAT-taxable operations and destroyed or lost due to force majeure circumstances are not considered used in non-taxable operations or non-business activities. Accordingly, in such cases, there is no obligation to charge tax liabilities under paragraph 198.5 of the Tax Code and to issue a consolidated tax invoice.

In this part, the Tax Service also makes an important caveat: to apply the relevant provisions of paragraph 32-1, a certificate confirming the occurrence of force majeure circumstances is required.

But there is an important nuance: a fixed asset and goods are not the same. The Tax Service separately notes that the relevant provisions of paragraph 32-1 of subsection 2 of section XX of the Tax Code apply to goods purchased with VAT that are not classified as fixed assets and that were destroyed or lost due to force majeure during martial law or emergency state.

For fixed assets, a different mechanism works – primarily the provisions of paragraph 189.9 of the Tax Code and the rules for documentary confirmation of destruction or damage. Therefore, the enterprise should not mechanically apply the same scheme to destroyed goods and destroyed equipment.

The tax regime depends on what exactly was lost.

Profit tax

For calculating profit tax, the enterprise uses accounting and financial reporting data on income, expenses, and financial result before taxation. If the taxpayer applies tax differences, paragraph 138.1 of article 138 of the Tax Code provides for an increase in the financial result, in particular, by the amount of the residual value of a fixed asset object in case of its liquidation.

At the same time, paragraph 138.2 provides for a corresponding decrease in the financial result by the amount of the residual value of the object, determined taking into account the provisions of article 138 of the Tax Code. And here the circumstance from which this story begins matters: the equipment was fully depreciated on the date of destruction. Its residual value in accounting was zero.

In the situation described by the enterprise in the inquiry, there is no residual value that could form the corresponding tax difference. In other words, full depreciation of the equipment has consequences not only for accounting but also for profit tax calculation.

Thus, for businesses that lost equipment during the war, it is important to understand: the mere fact of property destruction does not mean that the enterprise will automatically have to pay VAT on it. If the equipment was destroyed due to hostilities and the enterprise can confirm this with documents, it can write it off without charging VAT in the cases indicated by the Tax Service.

Such an evidentiary base will help calmly pass a tax audit and avoid additional tax liabilities due to property lost not by the enterprise’s fault.

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