Proposal for a COUNCIL IMPLEMENTING DECISION authorising Hungary to introduce 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: 2018-08-20
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Hungary, VAT, derogation from EU law, hire purchase, motor car, tax relief

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   EUROPEAN COMMISSION  Brussels, 20.8.2018 COM(2018) 599 final 2018/0314 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising Hungary to introduce 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  tax1  ('the  VAT  Directive'),  the  Council,  acting  unanimously  on  a 
proposal from the Commission,  may authorise any Member State to apply  special measures 
for  derogating  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 6 February 2018, Hungary requested to derogate 
from  Articles  26(1)(a),  168  and  168a  of  the  VAT  Directive  and  to  restrict  the  right  of 
deduction  of  VAT  on  the  leasing  of  passenger  cars  in  Hungary.  In  accordance  with  Article 
395(2)  of  the  VAT  Directive,  the  Commission  informed  the  other  Member  States  by  letter 
dated  8  June  2018  of  the  request  made  by  Hungary.  By  letter  dated  11  June  2018,  the 
Commission  notified Hungary that it had  all the information  it considered necessary for the 
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.  

Taxable persons in Hungary may currently deduct VAT on the leasing of passenger cars to the 
extent  that  the  passenger  car  is  used  for  the  taxable  person's  taxable  economic  activity. 
Taxable persons must thus be able to prove the extent to which they use their passenger cars 
for business purposes.  

Hungary submits that this system is difficult to apply. Keeping journey logs imposes a heavy 
burden on taxable persons in maintaining such logs and on the tax administration for checking 
them.  According  to  Hungary  it  is  often  difficult  to  determine  and  document  the  private  and 
professional  use  in  case  the  employee  keeps  the  vehicle  after  work  and  on  days  off. 
Inspections  have  shown  that  often  journey  logs  kept  by  taxable  persons  are  incorrect  and 
difficult to verify.  

Hungary  therefore  requests,  based  on  Article  395  of  the  VAT  Directive,  to  introduce  a 
measure derogating from  Articles 26(1)(a), 168 and 168a of the VAT Directive limiting the 
right of deduction on the leasing of passenger cars to a set percentage. In turn businesses will 
be relieved 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.  

The  restriction  to  the  right  of  deduction  should  apply  to  the  VAT  paid  on  the  leasing  of 
passenger cars which are used not exclusively for business purposes. Passenger cars covered 
by the measure will be motor vehicles principally designed for the transportation of maximum 
9 persons with a gross vehicle weight not exceeding 5 tons. Vehicles designed for transport of 
goods, vehicles serving special purposes (i.e.  crane truck, fire engine, truck-mixer), vehicles 
designed  for  the  transport  of  10  or  more  than  10  persons,  tractors  and  trailers  would  be 

1 

OJ L 347, 11.12.2006, p. 1. 

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excluded from the restriction to the right of deduction of VAT and would be treated under the 
normal rules.   

Based on estimations of the private use of company cars, Hungary submits that the average 
private  use  should  be  around  40-60%.  According  to  Hungary,  the  deduction  limit  should 
therefore be set at 50%.  

Taxable persons wishing to derogate from the 50% deduction limit and to deduct VAT to the 
proportion of actual business use will be allowed to do so provided they dispose of detailed 
evidence on the business use of leased passenger cars.  

The  derogation  should  apply  from  1  January  2019  and  should  be  limited  in  time  to  31 
December 2021, so that it can be assessed whether the 50% restriction is 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 2021.  

• 

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 VAT 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 
subsidiarity principle 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  simplify  tax  collection  and  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 

EX-POST 

EVALUATIONS, 

OF 

STAKEHOLDER 

Stakeholder consultations 

This proposal is based on a request made by Hungary 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  simplify  the  procedure  for  charging  tax  and  to  counter  VAT 
evasion and has, therefore, a potential positive impact for both businesses and administrations. 
The solution has been identified by Hungary 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 
2021. 

In case Hungary would consider another extension of the derogating measure beyond 2021, 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 2021. 

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2018/0314 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising Hungary to introduce 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 tax1, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

(6) 

By  letter  registered  with  the  Commission  on  6  February  2018,  Hungary  requested 
authorisation to derogate from the provisions of Directive 2006/112/EC governing the 
right to deduct input tax in relation to the leasing of passenger cars. 

The Commission transmitted the request of Hungary to other Member States by letter 
dated  8  June  2018.  By  letter  dated  11  June  2018,  the  Commission  notified  Hungary 
that it had all the information it considered necessary for the 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 supplied to a 
taxable person for the purposes of his taxed transactions. Point (a) of Article 26(1) of 
Directive  2006/112/EC  contains  a  requirement  to  account  for  VAT  when  a  business 
asset  is  put to  use  for  private  purposes  of  the  taxable  person  or  of  his  staff  or,  more 
generally, for purposes other than those of his business.  

Taxable  persons  in  Hungary  may  currently  deduct  VAT  on  the  leasing  of  passenger 
cars  to  the  extent  that  the  passenger  car  is  used  for  the  taxable  person's  taxable 
economic activity. In order to benefit from that VAT deduction, taxable persons have 
to prove the extent to which they use their passenger cars for business purposes.  

Hungary  claims  that  this  system  is  difficult  to  apply.  The  non-business  use  is  often 
very  difficult  to  identify  accurately  and  even  where  it  is  possible,  the  mechanism  is 
often burdensome.  

Hungary,  therefore,  requested  a  special  measure  whereby  the  amount  of  VAT  on 
expenditure eligible for deduction in respect of leasing of passenger cars which are not 
used entirely for business purposes should be set at a flat percentage rate. Based on its 
estimations, Hungary concludes that the most appropriate deduction limit is 50%. At 
the  same  time,  the  requirement  to  account  for  VAT  on  the  non-business  use  of 
passenger cars should be suspended where those cars have been subject to a deduction 
limitation of 50%.  

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OJ L 347, 11.12.2006 , p. 1.  

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(7) 

(8) 

(9) 

The limitation of the right of deduction under the requested authorisation should apply 
to  VAT  paid  on  the  leasing  of  passenger  cars  designed  for  the  transportation  of 
maximum nine persons with a gross vehicle weight not exceeding five tons. Vehicles 
designed for transport of goods, vehicles serving special purposes (i.e. crane truck, fire 
engine,  truck-mixer),  vehicles  designed  for  the  transport  of  ten  or  more  than  ten 
persons, tractors and trailers are excluded from the restriction to the right of deduction 
of VAT.  

Taxable persons who do not wish to apply the 50% deduction limit and wish to apply 
the VAT deduction up to the proportion of actual business use, should be able to do so 
based on detailed evidence on the 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.  The  requested  measure 
removes  the  need  to  keep  records  on  private  use  of  leased  business  cars  and,  at  the 
same  time,  prevents  tax  evasion  through  incorrect  record  keeping.  It  is  therefore 
appropriate to grant Hungary the authorisation to apply the requested measure.  

(10)  The  special measure  should  be  limited  in  time,  in  order  to  allow  for  a  review  of  the 
necessity and effectiveness of the derogating measure and the used apportionment rate 
between business and non-business. 

(11)  Where  Hungary  considers  that  an  extension  of  the  authorisation  beyond  2021  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 by 31 
March 2021. 

(12)  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:  

By  way  of  derogation  from  Articles  168  and  168a  of  Directive  2006/112/EC,  Hungary  is 
authorised  to  limit  to  50%  the  right  to  deduct  the  value  added  tax  (VAT)  on  expenditure 
related to 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,  Hungary 
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. 

Articles  1  and  2  shall  only  apply  to  passenger  cars  designed  for  the  transportation  of 
maximum nine persons with a gross vehicle weight not exceeding five tons.  

Article 3 

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

– 

vehicles designed for transport of goods,  

Article 4 

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– 

– 

– 

– 

vehicles serving special purposes (i.e. crane truck, fire engine, truck-mixer),  

vehicles designed for the transport of ten or more than ten persons,  

tractors,  

trailers.  

Article 5 

This Decision shall apply as from 1 January 2019 and shall expire on 31 December 2021.  

Any  request  for  the  extension  of  the  authorisation  provided  for  in  this  Decision  shall  be 
submitted to the Commission by 31 March 2021 and shall be accompanied by a report which 
includes a review of the percentage set out in Article 1. 

This Decision is addressed to Hungary.  

Done at Brussels, 

Article 6 

For the Council 
The President 

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