A disadvantageous contractual term is an impediment to VAT deduction

Under the terms of the contract, the customer may not dispose of goods before the transfer of title. They are posted to the off balance sheet account.

The Ministry of Finance determined that no VAT deduction may be applied in such a situation, because the customer has no right to use the goods in VATable transactions.

Note that, as it follows from the other letter of the Ministry of Finance, deduction may be used in regard to the invoice raised before the transfer of title to the goods. Yet, it remains unclear whether the title was transferred as of the time of deduction. We believe that, when applying VAT deduction, the transfer of title does not matter. However, it is important to comply with the conditions necessary for the deduction.

Document: Letter of the Ministry of Finance of Russia No. 03-07-11/48963 dated 22 August 2016