Proposal for a COUNCIL IMPLEMENTING DECISION amending Decision 2007/441/EC authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) and 168 of Council Directive 2006/112/EC on the common system of value added tax
Date: 2010-10-04
Institutions: European Commission
Subjects: Italy, VAT, basis of tax assessment, distributive trades, provision of services, tax exemption, tax harmonisation, tax on consumption, tax relief

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EUROPEAN COMMISSION 

Brussels, 4.10.2010 
COM(2010) 540 final 

2010/0269 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Decision 2007/441/EC authorising the Italian Republic to apply measures 
derogating from Articles 26(1)(a) and 168 of Council Directive 2006/112/EC on the 
common system of value added tax 

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EXPLANATORY MEMORANDUM 

CONTEXT OF THE PROPOSAL 

Grounds for and objectives of the proposal 

Pursuant  to  Article  395(1)  of  Directive  2006/112/EC  of  28  November  2006  on  the 
common  system  of  value  added  tax  (hereafter  ‘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  Secretariat-General  of  the  Commission  on  18  February 
2010,  the  Italian  Republic  requested  authorisation  to  continue  to  apply  a  derogation 
measure concerning the right of deduction of VAT borne on certain types of means of 
the 
transport.  In  accordance  with  Article  395(2)  of  Directive  2006/112/EC, 
Commission  informed  the  other  Member  States  by  letter  dated  13  July  2010  of  the 
request  made  by  the  Italian  Republic.  By  letter  dated  15  July  2010,  the  Commission 
notified  the  Italian  Republic  that  it  had  all  the  information  necessary  to  consider  the 
request. 

General context 

Article 168  of  the  VAT Directive  provides  that a taxable person is entitled to deduct 
the  VAT  charged  on  purchases  made  for  the  purposes  his  taxed  transactions.  At  the 
same  time,  Article  26(1)(a)  of  the  VAT  Directive  stipulates  that  the  use  of  goods, 
forming part of the assets of a business, for private purposes is to be considered as a 
supply  of  services  for  consideration  if  the  VAT  on  these  goods  was  wholly  or  partly 
deductible.  As  a  result,  the  system  ensures  that  final  consumption  is  taxed  when 
corresponding input VAT was initially deducted. 

In relation to motor vehicles, it is sometimes difficult and burdensome for the taxable 
persons to identify and register the split between business and private use and for the 
tax  administration  to  verify  the  effective  division  of  use.  Because  of  the  number  of 
mixed use vehicles, tax evasion could become considerable. 

In  order  to  simplify  VAT  collection  and  to  combat  tax  evasion,  the  Italian  Republic 
requested and obtained from the Council an individual derogation allowing it to restrict 
the  right  of  deduction  to  40%  in  relation  to  motorised  road  vehicles  (other  than 
agricultural  or  forestry  tractors,  normally  used  for  carrying  persons  or  goods  by  road 
with a maximum authorised mass not exceeding 3 500 kilograms and having not more 
than eight seats in addition to the driver's seat)1. However, it should be pointed out that 
certain  categories  of  vehicles  were  excluded  from  this  restriction,  such  as  vehicles 
forming  part  of  a  stock-in-trade,  for  instruction  by  driving  schools,  used  for  hire  or 
leasing, used by sales representatives and taxis. At the same time, businesses would be 

1 

Council  Decision  2007/441/EC  of  18  June  2007  authorising  the  Italian  Republic  to  apply  measures 
derogating  from  Articles  26(1)  and  168  of  Directive  2006/112/EC  on  the  common  system  of  value 
added tax (OJ L 165, 27.6.2007, p. 33). 

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relieved from accounting from tax on the private use. 

In  accordance  with  Article  6  of  the  above-mentioned  Decision,  the  Italian  Republic 
presented a report covering the first two years of the application of that Decision which 
included a review of the percentage restriction.  

It  appears  from  information  provided  by  the  Italian  Republic  in  that  report  that,  in 
particular given the very high number of small enterprises in the Italian Republic, the 
limitation  to  40%  would  still  be  corresponding  to  the  actual  circumstances  and 
therefore be appropriate. 

However,  any  extension  should  be  limited  in  time  in  order  to  asses  whether  the 
conditions,  on  which  the  derogation  is  based,  would  still  be  valid.  Therefore,  it  is 
proposed  to  extend  the  derogation  until  the  end  of  2013  and  to  request  the  Italian 
Republic to present a new report in case a new extension request would be envisaged 
beyond  that  end  date.  The  Decision  would  in  any  case  expire  in  case  EU  rules 
governing  restrictions  on  the  right  of  deduction  in  this  area  would  come  into  force 
before that end date. 

Existing provisions in the area of the proposal 

Article  176  of  the  VAT  Directive  stipulates  that  the  Council  shall  determine  the 
expenditure of which the VAT is not deductible. Until such time, Member States are 
authorised to maintain exclusions which were in place on 1 January 1979. Therefore, 
there  are  a  number  of  "standstill"  provisions  restricting  the  right  of  deduction  in 
relation  to  motor  vehicles.  Furthermore,  similar  deduction  restrictions  have  also  been 
granted to other Member States on the basis of Article 395 of the VAT Directive. 

In  2004,  the  Commission  made  a  proposal2  which  contains  rules  on  which  forms  of 
expenditure may be subject to a restriction on the right to deduct but the Council has 
not been able yet to reach an agreement on that proposal. 

Consistency with the other policies and objectives of the Union 

Not applicable. 

CONSULTATION OF INTERESTED PARTIES AND IMPACT ASSESSMENT 

Consultation of interested parties 

Not relevant. 

Collection and use of expertise 

There was no need for external expertise. 

Impact assessment 

The  proposal  is  designed  to  counter  VAT  evasion  and  to  simplify  the  procedure  for 

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COM(2004) 728final (OJ C 24, 29.1.2005, p. 10). 

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charging tax and has, therefore, a potential positive impact. 

Because of the narrow scope of the derogation and its limited application in time, the 
impact will in any case be limited. 

LEGAL ELEMENTS OF THE PROPOSAL  

Summary of the proposed action 

Authorisation for the Italian Republic to continue to apply a derogating measure from 
the VAT Directive as to restrict to 40% the right of a taxable person to deduct VAT on 
expenditure related to motorised road vehicles when the vehicle is not used exclusively 
for business purposes. When the right of deduction has been limited, the taxable person 
is  relieved  from  the  obligation  to  account  for  VAT  on  the  private  use.  Any  possible 
request for extending the measure should be accompanied by the submission of a report 
on the application of the derogation. 

Legal basis 

Article 395 of the VAT Directive 2006/112/EC of 28 November 2006 on the common 
system of value added tax. 

Subsidiarity principle 

The  proposal  falls  under  the  exclusive  competence  of  the  EU  institutions.  The 
subsidiarity principle therefore does not apply. 

Proportionality principle 

The proposal complies with the proportionality principle for the following reason(s). 

The  Decision  concerns  an  authorisation  granted  to  a  Member  State  upon  its  own 
request and does not constitute any obligation. 

Given the limited scope of the derogation, the special measure is proportionate to the 
aim pursued. 

Choice of instruments 

Proposed instruments: Decision. 

Other means would not be adequate for the following reason(s). 

Under  Article  395  of  the  VAT  Directive,  derogation  from  the  common  VAT  rules  is 
only possible with the authorisation of the Council acting unanimously on a proposal 
from  the  Commission.  A  Council  implementing  Decision  is  the  most  suitable 
instrument since it can be addressed to individual Member States. 

BUDGETARY IMPLICATION 

The proposal has no implication for the Union budget. 

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ADDITIONAL INFORMATION 

Review/revision/sunset clause 

The proposal includes a review clause and a sunset clause. 

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2010/0269 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Decision 2007/441/EC authorising the Italian Republic to apply measures 
derogating from Articles 26(1)(a) and 168 of Council Directive 2006/112/EC on the 
common system of value added tax  

THE COUNCIL OF THE EUROPEAN UNION, 

Having regard to the Treaty on the Functioning of the European Union, 

Having  regard  to  Council  Directive  2006/112/EC  of  28  November  2006  on  the  common 
system of value added tax3, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

In  a  letter  registered  by  the  Commission’s  Secretariat  General  on  18  February  2010, 
Italy requested authorisation to extend a measure derogating from Article 26(1)(a) and 
Article  168  of  Directive  2006/112/EC  in  order  to  continue  to  restrict  the  right  of 
deduction  in  relation  to  expenditure  on  certain  motorised  road  vehicles  not  wholly 
used for business purposes. 

The Commission  informed the  other  Member  States of the  request  made by Italy by 
letter dated 13 July 2010. By letter dated 15 July 2010, the Commission notified Italy 
that it had all the information necessary to consider the request. 

Council  Decision  2007/441/EC  of  18  June  2007  authorising  the  Italian  Republic  to 
apply  measures  from  Articles  26(1)(a)  and  168  of  Directive  2006/112/EC  on  the 
common system of value added tax4, authorised Italy to limit the right of deduction of 
value added tax (VAT) charged on expenditure on motorised road vehicles not wholly 
used for business purposes to 40%. Decision 2007/441/EC also provided that the use 
for private purposes of those vehicles which had been subject to a right of deduction 
restriction  under  that  Decision  was  not  to  be  considered  as  a  supply  of  services  for 
consideration. Decision 2007/441/EC also contains definitions of the vehicles and the 
expenditure included in the scope of that Decision and a list  of vehicles which were 
explicitly excluded from the scope of that Decision. 

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OJ L 347, 11.12.2006, p. 1. 
OJ L 165, 27.6.2007, p. 33. 

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(4) 

In accordance with Article 6 of Decision 2007/441/EC, Italy submitted a report to the 
Commission covering the two first years of application of the Decision which included 
a review of the percentage restriction. The information provided by Italy shows that a 
restriction  of  the  right  of  deduction  to  40%  still  corresponds  to  the  actual 
circumstances as regards the business and non-business use of the vehicles concerned. 
Italy  should  therefore  be  authorised  to  apply  the  measure  during  a  further  limited 
period, until 31 December 2013.  

(5)  Where  Italy  considers  a  further  extension  beyond  2013,  a  new  report  should  be 
submitted to the Commission together with that extension request no later than 1 April 
2013. 

(6) 

On  29  October  2004,  the  Commission  adopted  a  proposal  for  a  Council  Directive 
amending  Directive  77/388/EEC  with  a  view  to  simplifying  value  added  tax 
obligations5. The derogating measures provided for in this Decision should expire on 
the date of entry into force of such amending Directive, if that date is earlier than the 
date of expiry provided for in this Decision. 

(7) 

The  derogation  has  no  impact  on  the  Union’s  own  resources  accruing  from  value 
added tax. 

(8) 

Decision 2007/441/EC should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

Decision 2007/441/EC is amended as follows: 

(1) 

Article 6 is replaced by the following: 

"Article 6 

Any request for the extension of the measures provided for in this Decision shall be submitted 
to the Commission no later than 1 April 2013. 

Any request for extension of those measures shall be accompanied by a report which includes 
a  review  of  the  percentage  restriction  applied  on  the  right  to  deduct  VAT  charged  on 
expenditure on motorised road vehicles not wholly used for business purposes." 

(2) 

Article 7 is replaced by the following: 

"Article 7 

This  Decision  shall  expire  on  the  date  of  entry  into  force  of  Union  rules  determining  the 
expenditure  relating  to  motorised  road  vehicles  which  is  not  eligible  for  a  full  deduction  of 
value added tax, and on 31 December 2013 at the latest." 

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COM(2004) 728 final. 

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This Decision shall apply from 1 January 2011. 

Article 2 

Article 3 

This Decision is addressed to the Italian Republic. 

Done at Brussels,  

For the Council 
The President 

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