Proposal for a COUNCIL IMPLEMENTING DECISION authorising Latvia to introduce 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: 2015-10-30
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, derogation from EU law, motor vehicle, tax relief

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   EUROPEAN COMMISSION  Brussels, 30.10.2015  COM(2015) 546 final 2015/0254 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION authorising Latvia to introduce 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  
 
EXPLANATORY MEMORANDUM 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons 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 Commission on 8 April 2015, Latvia requested authorisation to 
continue  to  apply  a  measure  derogating  from  the  overall  principles  governing  the  right  of 
deduction  of  input  VAT  in  relation  to  certain  passenger  cars.  Together  with  the  request  for 
extension,  Latvia  submitted  a  report  covering  the  application  of  Council  Implementing 
Decision 2013/191/EU which includes a review of the percentage foreseen for the limitation 
of the right of deduction. The request and report were further completed on 30 July 2015. 

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member  States  by  letters  dated  21  and  24  August  2015  of  the  request  made  by  Latvia.  By 
letter dated 24 August 2015, the Commission notified Latvia that it had all the information it 
considered necessary for appraisal of the request. 

General context 

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.  

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 
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.  

In  order  to  simplify  VAT  collection  and  combat  tax  evasion,  in  2011  Latvia  requested  an 
individual derogation allowing it to restrict the right of deduction to 80% in relation to certain 
passenger  cars.  The  derogation  request  was  approved  by  the  Council  by  Decision 
2013/191/EU  of  22  April  2013  and  expires  on  31  December  2015.  Some  categories  of 
vehicles  were  specifically  excluded  from  this  restriction,  such  as  cars  purchased  for  resale, 
hire or lease; cars used for transportation of passengers (such as taxis) or goods; cars used for 
driving  lessons;  cars  used  for  guard  or  emergency  services;  cars  used  as  car  sales 
demonstration vehicle. At the same time, businesses would be relieved from accounting from 
tax on the private use.   

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In  accordance  with  Article  6(b)  of  the  above  mentioned  Decision,  Latvia  has  presented  a 
report  covering  the  application  of  the  Decision  which  included  a  review  of  the  percentage 
restriction.  

It appears from the information provided by Latvia that the 80% rate of deduction no longer 
corresponds to the actual circumstances and that this rate should be decreased to 50%. Latvia 
is supporting the new percentage limitation with statistical figures derived from a special tax 
on  light  vehicles  owned  or  held  by  commercial  operators  that  are  used  for  private  and 
business activities. According to the information submitted by Latvia, the special tax was paid 
for 79% of all roadworthy light vehicles held or owned by legal persons. Latvian authorities 
also  provide  that  the  percentages  of  the  legal  persons  that  have  at  least  one  light  vehicle 
registered and which paid the special tax on light vehicles was 87.6% in 2012, 92.5% in 2013 
and  86.2%  in  2014.  In  addition,  99.6%  of  the  registered  businesses  in  Latvia  are  small  and 
medium  enterprises.  Latvia  considers  that,  on  the  basis  of  this  statistical  information  which 
covers  most  of  the  taxable  persons,  it  can  be  concluded  that  their  overall  private  use  of 
passenger cars corresponds to 50%. The new limitation should therefore be set at 50%.    

All the other conditions of the derogation will continue to apply. Thus, the new system will 
apply to all passenger cars with a maximum of eight seats in addition to the driver's seat and 
under a certain weight that are not used exclusively for business purposes. In the same way, 
passenger cars which are used for certain specific activities would also 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 lessons; cars used for guard or emergency services; cars used as car sales 
demonstration vehicle. 

Given the change in percentage, a new derogation is more suitable than an extension of the 
existing one. The new derogation should be limited in time to 31 December 2018 in order to 
assess  whether  the  conditions  on  which  the  derogation  is  based  would  still  be  valid.  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 2018. 

• 

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, including Latvia through Decision 2013/191/EU of 22 April 2013.  

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. 

• 

Consistency with other Union policies 

Not applicable 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive. 

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• 

Subsidiarity (for non-exclusive competence)  

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 

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, i.e. to combat tax evasion and to simplify VAT collection. 

• 

Choice of the instrument 

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. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Ex-post evaluations/fitness checks of existing legislation 

Not applicable. 

• 

Stakeholder consultations 

This proposal is based on a request made by Latvia and concerns only this Member State. 

• 

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. 

4. 

BUDGETARY IMPLICATIONS 

The proposal has no implication for the union budget. 

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

The proposal includes a sunset clause; an automatic time limit which is set at 31 December 
2018 for this derogation. 

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2015/0254 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising Latvia to introduce 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) 

(2) 

(3) 

(4) 

(5) 

By letter registered at the Commission on 8 April 2015, Latvia requested authorisation 
to  continue  under  certain  conditions  to  apply  a  measure  derogating  from  Article 
26(1)(a) and Articles 168 and 168a of Directive 2006/112/EC in  order to restrict the 
right of deduction in relation to expenditure on certain passenger cars not wholly used 
for business purposes. The request was further completed on 30 July 2015. 

In  accordance  with  the  second  subparagraph  of  Article  395(2)  of  Directive 
2006/112/EC, by letters dated 21 and 24 August 2015, the Commission informed the 
other Member States of the request made by Latvia. By letter dated 24 August 2015, 
the  Commission  notified  Latvia  that  it  had  all  the  information  necessary  to  consider 
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. 
Council  Implementing  Decision  2013/191/EU2  authorised  Latvia  to  introduce  a 
derogating measure pursuant to Article 395(1) of Directive 2006/112/EC to limit the 
right of deduction of input VAT to 80% as regards purchase, leasing, intra-Community 
acquisition  and  importation  of  specified  passenger  cars  and  on  related  expenditure 
thereto, including the purchase of fuel, when the vehicles are not used exclusively for 
business  purposes.  Council Implementing  Decision  2013/191/EU  is  due  to  expire  on 
31 December 2015. 

Together  with  the  request,  Latvia  submitted  a  report  covering  the  application  of 
Council  Implementing  Decision  2013/191/EU  which  includes  a  review  of  the 
percentage  foreseen  for  the  limitation  of  the  right  of  deduction.  It  appears  from  the 
information provided by Latvia that the 80% rate of deduction no longer corresponds 
to  the  actual  circumstances  and  that  this  rate  should  be  decreased  to  50%.  The 

1 
2 

OJ L 347, 11.12.2006, p. 1. 
OJ L 113, 25.04.2013, p.11 

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information is based on statistical figures derived from a special tax on light vehicles 
owned  or  held  by  commercial  operators  that  are  used  for  private  and  business 
activities.  

The limitation of the right of deduction under the measure 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 measure 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. 

Latvia should therefore be authorised to apply the measure for a limited period, until 
31 December 2018. 

In  the  event  Latvia  were  to  request  an  extension  of  the  derogating  measure  beyond 
2018,  a  report  should  be  submitted  to  the  Commission  together  with  the  extension 
request no later than 31 March 2018. 

(6) 

(7) 

(8) 

(9) 

(10)  The derogation would only have 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:  

By  way  of  derogation  from  Articles  168  and  168a  of  Directive  2006/112/EC,  Latvia  is 
authorised to limit to 50% the right to deduct the value added tax (VAT) on expenditure on 
passenger cars not wholly used for business purposes. 

Article 1 

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. 

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 for such cars. 

Article 3 

This  Decision  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 

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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 

1. 

2. 

This Decision shall take effect on the day of its notification. 

This Decision shall apply from 1 January 2016. It shall expire on 31 December 2018.  

Any request for the extension of the authorisation provided for in this Decision shall 
be  submitted  to  the  Commission  by  31  March  2018  and  accompanied  by  a  report 
which includes a review of the percentage set out in Article 1. 

This Decision is addressed to the Republic of Latvia. 

Done at Brussels, 

Article 7 

For the Council 
The President 

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