authorising Croatia to introduce a special measure derogating from point (a) of Article 26(1) and Article 168 of Council Directive 2006/112/EC on the common system of value added tax

EXPLANATORY MEMORANDUM

Pursuant to Article 395(1) of 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 derogating 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 22 December 2016, Croatia requested to derogate from Articles 26(1)(a) and 168 of the VAT Directive and to restrict the right of deduction of VAT regarding the purchase and lease of aircrafts, vessels and personal cars including the purchase of accessories for such goods as well as services supplied in relation thereto. After a number of discussions with the Commission Croatia modified its request and a new request was submitted and registered with the Commission on 17 September 2018. In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 21 September 2018 of the request made by Croatia. By letter dated 24 September 2018, the Commission notified Croatia 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 made for the purpose of taxed transactions. Article 26(1)(a) of the same Directive requires the use of goods forming part of the assets of a business for private purposes to be a supply of services for consideration if the VAT on the goods was eligible for deduction. This system allows for the recovery of initially deducted VAT in relation to the private use.

Currently taxable persons in Croatia cannot deduct input VAT relating to personal cars unless the personal cars are used for drivers training, vehicles testing, repair service, economic activity of transporting passengers and goods, transport of deceased, rent and purchase for the purpose of resale. Taxpayers in Croatia continuously require the abolishment of this restriction on the right of VAT deduction on the purchase and lease of personal cars and on the expenses related thereto. Croatia intends to modify its legislation and allow the deduction of input VAT relating to passenger cars not wholly used for business purposes.

At the same time Croatia submits that it is complicated to determine the extent to which cars are used for private and for professional purposes. Croatia therefore considers that it would be appropriate to apply the fixed percentage for the VAT deduction. According to Croatia the application of the fixed percentage limit for the VAT deduction will not result in additional administrative burden and costs neither for businesses nor for tax authorities while the VAT deduction will be possible. The introduction of the VAT deduction will reduce the interest of taxpayers to procure goods and services related to passenger cars from persons performing a non-registered activity.

Croatia therefore requests, based on Article 395 of the VAT Directive, to introduce a measure derogating from Articles 26(1)(a) and 168 of the VAT Directive limiting the right of deduction on passenger cars to a set percentage.

Croatia conducted an analysis of the use of cars for business purposes which revealed that the business use should be estimated at approximately 40-60%. That is why Croatia submits that the 50% is the appropriate percentage limit.

The restriction to the right of deduction should apply to the VAT paid on the purchase and lease of personal cars including the purchase of all goods as well as services supplied in relation thereto. Passenger cars covered are considered to be motor vehicles intended for transport of persons with a maximum of eight seats in addition to the driver's seat.

The personal cars used for drivers training, vehicles testing, repair service, economic activity of transporting passengers and goods, transport of deceased, rent and purchase for the purpose of resale are not covered by the percentage limit.

The derogation should apply from 1 January 2019 and should be limited in time to 31 December 2021, so that it can be assessed whether the 50% restriction is a correct reflection of the overall apportionment between business and private use. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission with that request by 31 March 2021.

•Consistency with existing policy provisions in the policy area

Similar derogations in relation to the right of deduction have been granted to other Member States.

Article 176 of the VAT Directive stipulates that the Council shall determine the expenditure on which the VAT is not deductible. Until such time, it authorises Member States to maintain exclusions which were in place on 1 January 1979. There are therefore a number of “stand still” provisions restricting the right to deduct VAT in relation to passenger cars.

Notwithstanding previous initiatives to establish rules on which categories of expenditure may be subject to a restriction on the right to deduct, such derogation is appropriate in the awaiting of a harmonisation of these rules at EU level.

2.LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY

•Legal basis