Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Estonia to apply a special measure derogating from point (a) of Article 26(1) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2014-10-10
Institutions: European Commission
Subjects: Estonia, VAT, derogation from EU law, motor vehicle, tax reform, tax relief













EUR-Lex - 52014PC0622 - EN











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52014PC0622

Proposal for a COUNCIL IMPLEMENTING DECISION authorising the Republic of Estonia to apply a special measure derogating from point (a) of Article 26(1) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax /* COM/2014/0622 final - 2014/0288 (NLE) */









EXPLANATORY MEMORANDUM
1.           CONTEXT 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 Commission on
26 May 2014, Estonia requested authorisation to apply a measure derogating from
the overall principles governing the right of deduction of input tax in
relation to passenger cars. In accordance with Article 395(2) of the VAT
Directive, the Commission informed the other Member States by letter dated 11
June 2014 of the request made by Estonia. By letter dated 12 June 2014, the
Commission notified Estonia 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 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 Estonia would make use of the option provided
for in Article 168a 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, Estonia has requested to be
allowed to restrict the right of deduction to a set percentage 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 Estonia, it appears that, on average, 50% of the use of business passenger cars are used
for private purposes. The percentage restriction should therefore be set at
50%.
The new system will apply to all passenger
cars with a maximum of eight seats in addition to the driver’s seat, not
exceeding 3500 kilograms and which 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), and cars
used for driving lessons. 
The derogation should be limited in time to
31 December 2017, in order to be able to assess whether the 50% 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 2017. 
Existing provisions in the area of the
proposal
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 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 Estonia to restrict the right of deduction to 50% of VAT incurred on expenditure in
relation to business passenger cars not exclusively used for business purposes.
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
Considering the provision of the VAT Directive
on which the proposal is based, the proposal falls under the exclusive
competence of the Union. The subsidiarity principle therefore does not apply. 
Proportionality principle
The proposal complies with the
proportionality principle for the following reasons.
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 
The proposal includes a sunset clause.
2014/0288 (NLE)
Proposal for a
COUNCIL IMPLEMENTING DECISION
authorising the Republic of Estonia to apply a special measure derogating from point (a) of Article 26(1) 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 tax[1], and in particular
Article 395(1) thereof,
Having regard to the proposal from the
European Commission,
Whereas:
(1)       By letter registered with
the Commission on 26 May 2014, Estonia requested authorisation to derogate from
the provisions of Directive 2006/112/EC governing the right to deduct input tax
in relation to passenger cars.
(2)       The Commission informed
the other Member States by letter dated 11 June 2014 of the request made by Estonia. By letter dated 12 June 2014, the Commission notified Estonia that it had all the
information it considered necessary for appraisal of the request.
(3)       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.
(4)       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 currently available
information, the Estonian authorities believe that a rate of 50% 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 those cars have been subject to a limitation. 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.
(5)       The limitation of the
right of deduction under the requested 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.
(6)       The requested 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, since 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.
(7)       The authorisation should
be limited in time until 31 December 2017, in order to allow for a review of
the necessity and effectiveness of the derogating measure and the apportionment
rate between business and non-business use it is based on.
(8)       Where Estonia considers that an extension of the authorisation beyond 2017 is necessary, it should submit
to the Commission a report which includes a review of the percentage limit
applied together with the request for an extension no later than 31 March 2017.
(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, Estonia is authorised to limit to 50% the right of
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, Estonia shall not treat as supplies of
services for consideration the use for non-business 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.
Article 3
The expenditure referred to in Article 1
shall cover the purchase, leasing, intra-Community acquisition and importation
of passenger cars not wholly used for business purposes as well as expenditure
related to the maintenance, repair and fuel for such cars.
Article 4
The Decision 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.
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 driving
lessons.
Article 6
This Decision shall expire on 31 December
2017. Any request for the extension of the authorisation provided for in this
Decision shall be submitted to the Commission by 30 March 2017 and accompanied
by a report which includes a review of the percentage set out in Article 1.
Article 7
This Decision is addressed to the Republic of   Estonia. 
Done at Brussels,
                                                                       For
the Council
                                                                       The
President
[1]               OJ L 347, 11.12.2006, p. 1.