Proposal for a COUNCIL DECISION authorising Latvia to introduce a special measure derogating from Article 26(1)(a) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2013-02-12
Institutions: European Commission
Subjects: Latvia, VAT, derogation from EU law, motor car, tax relief

EUROPEAN 
COMMISSION 

Brussels, 12.2.2013  
COM(2013) 68 final 

2013/0043 (NLE) 

Proposal for a 

COUNCIL DECISION 

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

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EXPLANATORY MEMORANDUM 

1. 

CONTEXT OF THE PROPOSAL 

Ground and objectives of the proposal 

Pursuant  to  Article  395(1)  of  Council  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  that  Directive  in  order  to  simplify  the  procedure  for 
charging the tax or to prevent certain types of tax evasion or avoidance. 

By letter registered with the Commission on 17 June 2011, the Republic of Latvia (hereafter 
'Latvia')  requested  authorisation  to  apply  a  measure  derogating  from  the  overall  principles 
governing  the  right  of  deduction.  Latvia  substantially  amended  this  request  via  a  letter 
registered with the Commission on 27 August 2012. In accordance with Article 395(2) of the 
VAT  Directive,  the  Commission  informed  the  other  Member  States  by  letter  dated  26 
November 2012 of the request made by Latvia. By letter 30 November 2012, the Commission 
notified  Latvia  that  it  had  all  the  information  it  considered  necessary  for  appraisal  of  the 
request. 

General context 

Articles 168 and 168a of the VAT Directive provide that a taxable person is entitled to deduct 
the 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. 

In  the  case  of  passenger  cars,  this  system  is  difficult  to  apply,  in  particular  because  it  is 
difficult to identify the split between private and business use. Where records are kept, they 
add  an  additional  burden  to  both  the  business  and  the  administration  in  maintaining  and 
checking  them;  even  in  case  Latvia  would  make  use  of  the  option  provided  for  in  Article 
168a(2) of the VAT Directive to limit the deduction on expenditure related to company cars to 
the proportion of the taxable person's effective business use. 

Therefore,  Latvia  has  requested  to  be  allowed  to  restrict  the  right  of  deduction  at  a  set 
percentage of the initial deduction and in turn to relieve the business from accounting for tax 
on  the  private  use.  This  has  the  benefit  of  simplifying  the  system  for  all  concerned  and 
prevents, at the same time, tax evasion or avoidance because of incorrect record keeping. 

On the basis of information provided by Latvia, it appears that, on average, 20% of the use of 
business passenger cars is for private purposes. The percentage restriction should therefore be 
set at 20%. 

The new system will apply to all passenger cars with a maximum of eight seats and under a 
certain weight that are not used exclusively for business purposes. However, passenger cars 
which  are  used  for  certain  specific  activities  would  be  excluded  from  the  restriction  on  the 
right to deduct and would be treated under the normal rules: cars purchased for resale, hire or 
lease; cars used for transportation of passengers (such as taxis) or goods; cars used for driving 

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lessons;  cars  used  for  guard  or  emergency  services;  cars  used  as  car  sales  demonstration 
vehicle. 

On  29  October  2004,  the  Commission  presented  a  proposal  for  a  Council  Directive  that 
includes a harmonisation of the categories of expenses for which Member States may apply 
exclusions to the right to deduct (the so-called VAT simplification proposal (COM(2004)728 
final)). As expenses in relation to passenger cars are included in this proposal, any extension 
in the period of validity should not go beyond adoption and entry into force of the proposed 
Directive. The derogation should in any case be limited to 31 December 2015 if the proposed 
Directive has not come into force by that date, in order to be able to assess whether the 20% 
restriction  is  still  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 2015. 

Existing provisions in the area of the proposal 

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

Article  176  of  Directive  2006/112/EC  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 in relation to passenger cars. 

2. 

RESULTS OF CONSULTATIONS WITH THE INTERESTED PARTIES AND 
IMPACT ASSESSMENTS 

Consultation of interested parties 

Not relevant. 

Collection and use of expertise 

There was no need for external expertise. 

Impact assessment 

The Decision proposal aims in the first place at simplifying the collecting of VAT in relation 
to passenger cars partly used for non-business purposes and has therefore a potential positive 
impact. At the same time, tax evasion via incorrect record keeping is countered. 

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

3. 

LEGAL ELEMENTS OF THE PROPOSAL 

Summary of the proposed action 

Authorisation  for  Latvia  to  restrict  the  right  of  deduction  to  80%  of  VAT  incurred  on 
expenditure in relation to business passenger cars not exclusively used for business purposes. 

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Where that right to deduct has been limited, the taxable person is relieved from accounting for 
VAT on the private use of the car. 

Legal basis 

Article 395 of the VAT Directive. 

Subsidiarity principle 

In accordance with Article 395 of the VAT Directive, a Member State wishing to introduce 
measures derogating from the said Directive must obtain an authorisation from the Council, 
which  will  take  the  form  of  a  Council  Decision.  Therefore,  the  proposal  complies  with  the 
subsidiarity principle. 

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 

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.  Moreover,  a  Council  Decision  is  the  most  suitable  instrument  since  it  can  be 
addressed to individual Member States. 

4. 

BUDGETARY IMPLICATION 

The proposal has no implication for the union budget. 

5. 

OPTIONAL ELEMENTS 

Review/revision/sunset clause 

The proposal includes a sunset clause. 

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2013/0043 (NLE) 

Proposal for a 

COUNCIL DECISION 

authorising Latvia to introduce a special measure derogating from Article 26(1)(a) and 
Articles 168 and 168a of 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 tax1, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

By letters registered at the Commission on 17 June 2011 and 27 August 2012, Latvia 
requested  authorisation  to  derogate  from  the  provisions  of  Directive  2006/112/EC 
governing the right to deduct input tax in relation to passenger cars. 

The Commission informed the other Member States by letter dated 26 November 2012 
of  the  request  made  by  Latvia.  By  letter  dated  30  November  2012,  the  Commission 
notified Latvia that it had all the information it considered necessary for appraisal of 
the request. 

Articles 168 and 168a of Directive 2006/112/EC establish a taxable person's right to 
deduct value added tax (VAT) charged on supplies of goods and services received by 
him for the use of his taxed transactions. Article 26(1)(a) of that Directive contains a 
requirement to account for VAT when a business asset is put to non-business use. 

The non-business use is often very difficult to identify accurately and even where it is 
possible,  the  mechanism  for  doing  so  is  often  burdensome.  Under  the  requested 
authorisation, the amount of VAT on expenditure eligible for deduction in respect of 
passenger  cars  which  are  not  used  entirely  for  business  purposes  should,  with  some 
exceptions, be set at a flat percentage rate. Based on information provided by Latvia, a 
rate  of  80%  is  justifiable.  At  the  same  time,  in  order  to  avoid  double  taxation,  the 
requirement of accounting for VAT on the non-business use of passenger cars should 
be suspended where they have been subject to limitation authorised by this Decision. 
This  simplification  measure  removes  the  need  to  keep  records  on  private  use  of 
business  cars  and,  at  the  same  time,  prevents  tax  evasion  through  incorrect  record 
keeping. 

1 

OJ L 347, 11.12.2006, p. 1. 

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(5) 

(6) 

(7) 

The limitation of the right of deduction under the authorisation should apply to VAT 
paid  on  the  purchase,  leasing,  intra-Community  acquisition  and  importation  of 
specified passenger cars and on expenditure related thereto, including the purchase of 
fuel. 

The  authorisation  should  only  apply  to  passenger  cars  with  a  maximum  authorised 
weight not exceeding 3500 kilograms and having not more than eight seats in addition 
to the driver's seat. Any non-business use of passenger cars exceeding 3500 kilograms 
or having more than eight seats in addition to the driver's seat is negligible due to their 
nature or the type of business they are used for. A detailed list of specific passenger 
cars  excluded  from  that  authorisation  should  also  be  provided,  based  on  their 
particular use. 

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 
obligations2. Directive 77/388/EEC has in the meanwhile been replaced by Directive 
2006/112/EC. That proposal includes the harmonisation of the categories of expenses 
for  which  exclusions  of  the  right  of  deduction  may  apply.  Under  that  proposal, 
exclusions  to  the  right  to  deduct  may  be  applied  to  motorised  road  vehicles.  It  is 
therefore  appropriate  to  restrict  the  application  period  of  this  Decision  until  that 
Directive  comes  into  force.  However,  it  is  necessary  to  provide  for  a  specific  expiry 
date of the authorisation if that Directive has not come into force by that date, as it is 
necessary  to  review  this  authorisation  and  the  percentage  of  overall  apportionment 
between business and private use. 

(8)  Where  Latvia  would  consider  that  an  extension  of  the  authorisation  beyond  2015  is 
necessary, it should submit to the Commission a report which includes a review of the 
percentage applied together with the request for the extension no later than 30 March 
2015. 

(9) 

The derogation will only have a negligible effect on the overall amount of tax revenue 
collected  at  the  stage  of  final  consumption  and  will  have  no  adverse  impact  on  the 
Union's own resources accruing from VAT, 

HAS ADOPTED THIS DECISION:  

Article 1 

By  way  of  derogation  from  Articles  168  and  168a  of  Directive  2006/112/EC,  Latvia  is 
authorised to limit to 80% the right to deduct the value added tax (VAT) on expenditure on 
passenger cars not wholly used for business purposes. 

Article 2 

By way of derogation from point (a) of Article 26(1) of Directive 2006/112/EC, Latvia shall 
not treat as supplies of services for consideration the use for private purposes of a passenger 
car included in the assets of a taxable person's business, where that car has been subject to a 
limitation authorised under Article 1 of this Decision. 

2 

COM(2004) 728 final 

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Article 3 

The  expenditure  referred  to  in  Article  1  shall  cover  the  purchase,  leasing,  intra-Community 
acquisition  and  importation  of  such  cars  as  well  as  expenditure  related  to  the  maintenance, 
repair and fuel. 

Articles  1  and  2  shall  only  apply  to  passenger  cars  with  a  maximum  authorised  weight  not 
exceeding 3500 kilograms and having not more than eight seats in addition to the driver's seat. 

Article 4 

Article 5 

Articles 1 and 2 shall not apply to the following categories of passenger cars: 

(a) cars purchased for resale, hire or lease; 

(b) cars used for transportation of passengers for a fee, including taxi services; 

(c) cars used for the provision of transportation of goods; 

(d) cars used for the provision of driving lessons; 

(e) cars used for the provision of guard services; 

(f) cars used as an emergency vehicle; 

(g) cars used as a car sales demonstration vehicle. 

Article 6 

Any  request  for  the  extension  of  the  authorisation  provided  for  in  this  Decision  shall  be 
submitted to the Commission by 30 March 2015. 

Any  request  for  extension  of  that  authorisation  shall  be  accompanied  by  a  report  which 
includes a review of the percentage set out in Article 1. 

Article 7 

This  Decision  shall  expire  on  the  date  of  entry  into  force  of  Union  rules  determining  the 
expenditure relating to motorised road vehicles that is not eligible for full deduction of VAT, 
or on 31 December 2015, whichever is the earlier. 

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Article 8 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels,  

For the Council 
The President 

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