EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (‘the VAT Directive’), the Council, acting unanimously on a proposal from the Commission, may authorise any Member State to apply special measures for derogation from the provisions of that Directive in order to simplify the procedure for collecting VAT or to prevent certain forms of tax evasion or avoidance.

By letter registered with the Commission on 14 January 2019, Poland requested an extension of the derogation from Articles 26(1)(a) and 168 of the VAT Directive in order to continue (a) to limit to 50% the right of deduction of input VAT on expenditure relating to certain motor vehicles and (b) to exempt from VAT the use by taxable persons of motor vehicles covered by the derogation for private purposes or for any purpose other than business activities. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 15 April 2019 on the request made by Poland. By letter dated 16 April 2019, the Commission notified Poland that it had all the information it considered necessary for the appraisal of the request.

1.CONTEXT OF THE PROPOSAL

•Reasons for and objectives of the proposal

Article 168 of the VAT Directive provides that a taxable person is entitled to deduct VAT charged on purchases of goods or services used for the purposes of taxed transactions in the Member State where such transactions take place. Article 26(1)(a) of the same directive stipulates that the use for private purposes of goods forming part of the assets of a business shall be considered as a supply of services for consideration if the VAT on such goods was eligible for deduction.

In the case of passenger cars forming part of the assets of a business, the application of the above provisions encounters a number of practical difficulties, in particular because it is not easy to distinguish between private and business use of a motor vehicle. Moreover, in cases where records about the use of such cars are kept, they add an additional burden to both businesses and administrations in terms of maintaining and controlling them. Those difficulties may increase the risk of VAT abuse or fraud attempts.

Poland is currently authorised to derogate from Article 168 of the VAT Directive by limiting to 50% the right to deduct VAT on the purchase, intra-Community acquisition, importation, hire or leasing of motor vehicles as well as VAT charged on expenditure related to those vehicles, provided that they are not used exclusively for business purposes. The derogation does not cover motor vehicles with a total maximum weight exceeding 3.5 tonnes and those with more than nine seats, including the driver’s seat. Similarly, it does not cover expenditures related entirely to the taxable person’s business.

In addition, Poland is authorised to derogate from Article 26(1)(a) of the VAT Directive by exempting from VAT the private use by the taxable person or their staff of vehicles caught by the above derogation. Any use for purposes other than business is considered as private use.

The authorisation for the above derogating measures was first granted by the Council by means of the Implementing Decision 2013/805/EU of 17 December 2013 for the period 1 January 2014 until 31 December 2016. Consequently, Poland incorporated the authorised measures into the national VAT legislation with effect from 1 April 2014.

In 2016, Poland requested an extension of the period in which the measures in question could be applied. The Council authorised such extension until 31 December 2019 by means of Implementing Decision (EU) 2016/1837 of 11 October 2016.

The present request from Poland to prolong further the derogation until 31 December 2022 is based on the same grounds as those presented in the previous requests. The request is accompanied by a report including a review of the percentage limitation applied on the right of deduction, as required by Article 3(2) of Decision 2013/805/EU.

Poland maintains that the current rate of 50% is justifiable and should continue to be applied, as it has contributed to simplifying the VAT collection procedure and has prevented tax evasion. According to the data submitted by Poland, small enterprises with modest turnover (microenterprises) and a few employees dominate the Polish economy. Such enterprises are either sole traders or family firms. In 2014-2017, they accounted for almost 96% of the total number of enterprises in the country. Poland argues that it is difficult to delineate between private and business use of corporate vehicles owned by such microenterprises. The same is true with regard to large companies, which often make their vehicles available for the exclusive use of their employees as a non-cash fringe benefit. It is true that establishing a distinction between private and business use of corporate vehicles would entail onerous and disproportionate costs on keeping appropriate records as compared to the potential benefits, notably as regards sole traders and microenterprises. It could also give rise to legal disputes between the tax authorities and taxable persons resulting in additional costs.

It is stated that the percentage rate set at 50% reflects adequately the actual business use of such vehicles. Indeed, as submitted by Poland, applying a higher or a lower rate would lead to excessively high discrepancies between the set rate and the actual use of vehicles for business activities and private purposes. This rate is similar to the percentage used in other Member States.

It appears that taxable persons have expressed a mostly positive opinion on both the conditions for deduction and the set percentage rate. The measures adopted by Decision 2013/805/EU are considered as a satisfactory compromise between the adopted rules and expensive, time-consuming and largely ineffective record keeping with the view to confirming that a particular vehicle has indeed been used for business activities.

The derogating measures are not expected to affect significantly the overall amount of the tax revenue of Poland collected at the stage of the final consumption. Likewise, they are not expected to adversely affect the Union’s own resources accruing from VAT.

In the light of the above, and given that the EU legal framework and the factual situation remain unchanged, the requested extension of the derogating measures until 31 December 2022 appears to be justified. Therefore, it is proposed that the request be granted. Should Poland wish to ask for a further extension beyond 2022, it shall submit an extension request by 1 April 2022, accompanied by a report including a review of the percentage restriction applied.