WRITTEN QUESTION P-2300/03

by Helena Torres Marques (PSE) to the Commission

(7 July 2003)

Subject: VAT deduction

Under European VAT law, anyone offering business or professional services or carrying out a commercial, industrial or agricultural activity is entitled to a full or partial VAT deduction when purchasing a car which is to be used in the context of that activity to generate profits for it.

In Portugal, however, the legislation transposing the Sixth Council Directive the VAT code does not allow any deduction from the VAT paid upon purchase of a vehicle for the purposes of commercial, industrial or agricultural activities.

Does the Commission consider that the Sixth Directive has been correctly transposed into Portuguese law?

If not, does the Commission consider it necessary to bring an action against the Portuguese State before the Court of Justice of the European Communities?

Answer given by Mr Bolkestein on behalf of the Commission

(31 July 2003)

The current Community rules on the deduction of VAT (Article 17(6) of the Sixth Directive(1)) permit the Member States to retain all the exclusions provided for under their national laws when the Directive came into force until new rules on expenditure not eligible for a deduction enter into force.

In Case C-43/96(2) the Court of Justice ruled that Article 17(6) authorises the retention of national VAT rules excluding from the right to deduct tax on vehicles constituting tools essential to the taxable person's business, since:

it is apparent from the wording of Article 17(6) of the Sixth Directive that, while it is for the Council to decide what expenditure is not eligible for a deduction of value added tax, the rules which the Council is called upon to adopt are not automatically limited to expenditure that is not strictly business expenditure. In those circumstances, the expression all the exclusions, used in the second subparagraph of Article 17(6) of the directive, comprises expenditure which is strictly business expenditure.

The Court of Justice pursued this line of reasoning in Case C-305/97(3). It ruled that Article 17(6) of the Sixth Directive authorises the Member States:

to retain general exclusions from the right to deduct the VAT payable on the purchase of motor cars used by a taxable person for the purposes of his taxable transactions, even where those cars were tools essential to the person's business or where they could not, in specific cases, be used for private purposes by that person.

The Commission considers the exclusions and restrictions that the Member States currently apply to the right to deduct by virtue of Article 17(6) of the Sixth Directive to be highly disparate, which can lead to distortions of competition. Though these disparities are nothing new, their adverse effects have become more visible since the creation of the internal market. The Commission feels that the directive it has proposed on the rules governing the right to deduct value added tax(4) would address the above problems effectively.

The proposed directive provides for the deletion of Article 17(6) from the Sixth Directive. It also introduces an optional arrangement for the deduction of VAT on passenger cars enabling Member States which so wish to determine the part of the non-business use of passenger cars in a simplified manner. Member States not wishing to apply this simplified procedure would, however, have to apply the normal deduction rules in this matter.

Under Article 93 of the EC Treaty, the adoption of this proposal calls for unanimous agreement in the Council. At the moment the proposal is still under discussion and no agreement has been reached on its adoption.

(1) Sixth Council Directive of 17 May 1977 on the harmonisation of the laws of the Member States relating to turnover taxes Common system of value added tax: uniform basis of assessment, OJ L 145, 13.6.1977.

(2) Commission of the European Communities v French Republic [1998] ECR I-3903.

(3) Royscot Leasing Ltd, Royscot Industrial Leasing Ltd, Allied Domecq plc and T.C. Harrison Group Ltd v Commissioners of Customs & Excise [1999] ECR I-6671.

(4) OJ C 219, 15.7.1998.