Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2014/797/EU authorising the Republic of Estonia to apply a measure derogating from point (a) of Articles 26(1) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2017-08-09
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Estonia, VAT, derogation from EU law, motor car, tax relief

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   EUROPEAN COMMISSION  Brussels, 9.8.2017  COM(2017) 421 final 2017/0188 (NLE)   Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision 2014/797/EU authorising the Republic of Estonia to apply a measure derogating from point (a) of Articles 26(1) and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax   
 
EXPLANATORY MEMORANDUM 

Pursuant to Article 395(1) of Directive 2006/112/EC of 28 November 2006 on the  common 
system  of  value  added  tax  ('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 18 April 2017, Estonia requested an extension of 
the derogation from Article 168 of the VAT Directive in order to continue to restrict the right 
to  deduct the input VAT on expenditure connected with  passenger cars. In  accordance with 
Article 395(2) of the VAT Directive, the Commission informed the other Member States by 
letter dated 14 June 2017 of the request made by Estonia.  By letter dated 15 June 2017, the 
Commission  notified  Estonia  that  it  had  all  the  information  it  considered  necessary  for 
appraisal of the request. 

1. 

• 

CONTEXT OF THE PROPOSAL 

Reasons for and objectives of the proposal 

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.  
Estonia is currently authorised on the basis of Council Implementing Decision 2014/797/EU1 
to  restrict  to  50  %  the  right  to  deduct  VAT  on  the  purchase,  leasing,  intra-Community 
acquisition, and importation of certain passenger cars as well as expenditure related thereto. 
This Decision shall expire on 31 December 2017. 

Estonia  has  requested  to  prolong  the  authorisation  to  limit  the  initial  deduction  to  a  set 
percentage  and  in  turn  to  relieve  the  business  from  accounting  for  tax  on  the  private  use. 
Estonia  informed  the  Commission  that  the  grounds  for  the  prolongation  of  the  measure  are 
largely  the  same  as  described  in  the  previous  request.  The  application  for  a  derogation  is  a 
continuation  of  the  arrangements  provided  for  in  the  aforementioned  Council  Decision.  In 
accordance  with  Article  6  of  Council  Decision  2014/797/EU,  Estonia  has  also  presented  a 
report  informing  that  from  the  moment  of  the  implementation  of  the  derogation,  companies 
have declared that around 66% of the cars owned by them are used partly for business-related 
purposes confirming that the derogation is justified.  

The measure 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 

1 

Council Implementing Decision 2014/797/EU of 7 November 2014 authorising the Republic of Estonia 
to apply a 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 (OJ L 330, 15.11.2014, p. 48).   

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rules: cars purchased for resale, hire or lease, cars used for transportation of passengers (such 
as taxis), and cars used for driving lessons.  

The  restriction  to  the  right  of  deduction  limit  should  apply  to  VAT  paid  on  the  purchase, 
leasing, intra-Community acquisition, and importation of specified passenger cars as well as 
expenditure related thereto.  

According  to  Estonia,  the  deduction  limit  should  be  set  at  50%.  The  estimated  extent  of 
company cars use for private purposes in Estonia is around 60%. However as this is based on 
indirect  evidence  and  assumptions  and  thus  could  be  overestimated,  the  50%  input  VAT 
deduction limit is the most appropriate.  

The  derogation  should  be  limited  in  time  to  31  December  2020,  so  that  it  can  be  assessed 
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 2020.  

• 

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.  

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.  

Notwithstanding previous initiatives to establish rules on which categories of expenditure may 
be  subject  to  a  restriction  on  the  right  to  deduct2,  such  derogation  is  appropriate  in  the 
awaiting of a harmonisation of these rules at EU level.  

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive.  

• 

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  European  Union.  The  subsidiarity  principle 
therefore does not apply. 

• 

Proportionality 

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  prevent  certain  forms  of  tax  evasion  or  avoidance.  In  particular,  given  the 
potential for businesses to under declare their liability and the burdensome check of mileage 
data for tax authorities, the 50% restriction would  simplify the VAT collection in a specific 
sector. 

2 

COM (2004) 728 final - Proposal for a Council Directive amending Directive 77/388/EEC with a view 
to simplifying value added tax obligations (OJ C 24, 29.1.2005, p.10) withdrawn on 21 May 2014 (OJ 
C 153 21. 05. 2014, p. 3)  

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• 

Choice of the instrument 

Proposed instrument: Council Implementing Decision. 

Under  Article  395  of  Council  Directive  2006/112/EC,  derogation  from  the  common  VAT 
rules  is  only  possible  upon  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 an individual Member State. 

3. 

• 

RESULTS 
CONSULTATIONS AND IMPACT ASSESSMENTS  

EVALUATIONS, 

EX-POST 

OF 

STAKEHOLDER 

Stakeholder consultations 

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

• 

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 charging 
tax and has, therefore, a potential positive impact for both businesses and administrations. The 
solution has been identified by Estonia as a suitable measure and is comparable to other past 
and present derogations. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative implication for the EU budget. 

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause; an automatic time limit which is set at 31 December 
2020. 

In case Estonia would consider another extension of the derogating measure beyond 2020, a 
report  including  a  review  of  the  percentage  limit  should  be  submitted  to  the  Commission 
together with the extension request no later than 31 March 2020. 

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2017/0188 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision 2014/797/EU authorising the Republic of Estonia to 
apply a measure derogating from point (a) of Articles 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 tax3, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

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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  purposes  of  his  taxed  transactions.  Point  (a)  of  Article  26(1)  of  that 
Directive contains a requirement to account for VAT when a business asset is put to 
use  for  private  purposes  of  the  taxable  person  or  his  staff  or,  more  generally,  for 
purposes other than those of his business. 
Council Implementing Decision 2014/797/EU4 authorised Estonia to restrict the right 
to deduct VAT on the purchase, leasing, intra-Community acquisition and importation 
of certain passenger cars and to relieve the taxable person from accounting for VAT 
on the non-business use of vehicles covered by the restriction. 

By  letter  registered  with  the  Commission  on  18  April  2017,  Estonia  requested  an 
authorisation to continue to apply special measures concerning the purchase, leasing, 
intra-Community  acquisition,  and  importation  of  certain  passenger  cars,  derogating 
from  the  provisions  laid  down  in  Directive  2006/112/EC  which  govern  a  taxable 
person's  right  to  deduct  VAT  paid  on  the  purchase  of  goods  and  services  and  those 
which  require  tax  to  be  accounted  for  on  business  assets  used  for  non-business 
purposes. 

In  accordance  with  Article  395(2)  of  Directive  2006/112/EU,  the  Commission 
informed the other Member States by letter dated 14 June 2017 of the request made by 
Estonia. By letter dated 15 June 2017, the Commission notified Estonia that it had all 
the information it considered necessary for appraisal of the request. 

In  accordance  with  Article  6(2)  of  Implementing  Decision  2014/797/EU  Estonia 
submitted,  together  with  the  extension  request,  a  report  to  the  Commission  on  the 
application  of  that  Implementing  Decision,  including  a  review  of  the  percentage 

OJ L 347, 11.12.2006 , p. 1.  
Council Implementing Decision 2014/797/EU of 7 November 2014 authorising the Republic of Estonia 
to apply a 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 (OJ L 330, 15.11.2014, p. 48).   

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restriction applied on the right of deduction. Based on currently available information, 
Estonia submits that a rate of 50% is still justifiable and remains appropriate.  

(6) 

The extension of these derogating measures should be limited in time to allow for an 
evaluation  of  their  effectiveness  and  of  the  appropriate  percentage.  Estonia  should 
therefore be authorised to continue to apply the measure for a limited period, until 31 
December 2020. 

(7)  Where  Estonia  considers  that  an  extension  of  the  authorisation  beyond  2020  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 2020. 

(8) 

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. 

(9) 

Implementing Decision 2014/797/EU should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 6 of Implementing Decision 2014/797/EU is replaced by the following: 

Article 1 

1.  

This Decision shall expire on 31 December 2020.  

'Article 6 

Any request for the extension of the authorisation provided for in this Decision shall 
2.  
be  submitted  to  the  Commission  by  31  March  2020  and  accompanied  by  a  report  which 
includes a review of the percentage set out in Article 1.' 

This Decision shall apply from 1 January 2018.  

Article 2 

This Decision is addressed to the Republic of Estonia. 

Done at Brussels, 

Article 3 

For the Council 
The President 

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