Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2015/2429 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: 2018-10-31
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, 31.10.2018  COM(2018) 721 final 2018/0373 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2015/2429 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 

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 20 June 2018, Latvia requested an 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  including  a  review  of  the  percentage  foreseen  for  the 
limitation of the right of deduction.  

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member  States  by  letters  dated  7  September  2018  of  the  request  made  by  Latvia.  By  letter 
dated  10  September  2018,  the  Commission  notified  Latvia  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 

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.  

By  Council  Implementing  Decision  2013/191/EU1  Latvia  was  granted  the  authorisation  to 
restrict the right of deduction to 80% in relation to certain passenger cars. Latvia considered 
that this percentage did not correspond to actual circumstances and by Council Implementing 
Decision  (EU)  2015/24292  Latvia  was  granted  the  authorisation  to  restrict  the  right  of 
deduction to 50%. The latter Decision expires on 31 December 2018 and Latvia requested to 
prolong it for another limited period of time.  

As  required  by  Article  6(2)  of  Implementing  Decision  (EU)  2015/2429,  Latvia  submitted  a 
report including the review of the percentage set for the VAT deduction.  

Latvia  considers that the applied percentage limit  remains appropriate. During the period of 
application of  the special  measure  Latvia has made full use of the deduction  restriction  and 

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Council Implementing Decision 2013/191/EU of 22 April 2013 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, OJ L 113, 25.4.2013, p. 11-12.  
Council Implementing Decision (EU) 2015/2429 of 10 December 2015 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, OJ L 334, 22.12.2015, p. 15-17.  

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recognises  that  it  allows  administrative  burden  to  be  eased  for  VAT  payers  and  for  the  tax 
administration where a passenger vehicle is not solely used for business purposes.  

The  conditions  for  the  application  of  the  derogation  continue  to  apply.  Thus,  the  special 
measure applies 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. Passenger 
cars which are used for certain specific activities are 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 positive impact of the special measure on the administrative burden of tax payers 
and  of  tax  authorities,  it  is  proposed  to  grant  the  derogating  measure  for  another  limited 
period,  until  31  December  2021.  Any  extension request  should  be  accompanied  by  a  report 
which includes a review of the percentage applied and should be sent to the Commission 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  deduct3,  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 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. 

3 

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 

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 

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  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 Latvia 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  Latvia  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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2018/0373 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision (EU) 2015/2429 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 tax4, 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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Council Implementing Decision (EU) 2015/24295 authorised Latvia to restrict the right 
of  deduction  to  50%  of  VAT  on  the  purchase,  leasing,  intra-Community  acquisition 
and importation of 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, as 
well  as  expenditure  related  to  maintenance,  repair,  and  fuel  of  such  passenger  cars 
until 31 December 2018.   

By  letter  registered  with  the  Commission  on  20  June  2018,  Latvia  requested  an 
authorisation  to  continue  to  apply  the  special  measure  derogating  from  point  (a)  of 
Article 26(1) 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  Commission  transmitted  the  request  of  Latvia  to  other  Member  States  by  letter 
dated 7 September 2018. By letter dated 10 September 2018, the Commission notified 
Latvia  that  it  had  all  the  information  it  considered  necessary  for  the  appraisal  of  the 
request. 

As  required  by  Article  6(2)  of  Implementing  Decision  (EU)  2015/2429,  Latvia 
submitted a report including the review of the percentage set for the VAT deduction. 
Based on  currently  available information,  Latvia claims that the limit  of  50% is still 
justifiable and remains appropriate. 

The  extension  of  the  derogating  measure  should  be  limited  in  time  to  allow  for  an 
evaluation  of  its  effectiveness  and  of  the  appropriate  percentage.  Given  the  positive 
impact of the derogating measure on the administrative burden of the taxpayers and of 
tax authorities, Latvia should therefore be authorised to continue to apply the measures 
for a limited period, until 31 December 2021. 

OJ L 347, 11.12.2006 , p. 1.  
Council Implementing Decision (EU) 2015/2429 of 10 December 2015 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, OJ L 334, 22.12.2015, p. 15-17. 

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(6)  Where Latvia considers that a further extension of the derogating measure is necessary 
beyond 2021, it should submit to the Commission a report that includes a review of the 
percentage applied, together with the extension request, by 31 March 2021. 

(7) 

(8) 

The derogation will 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. 

Council  Implementing  Decision  (EU)  2015/2429  should,  therefore,  be  amended 
accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

Article 6 of Council Implementing Decision (EU) 2015/2429 is replaced by the following: 

' Article 6 

1. This Decision shall apply from 1 January 2016 until 31 December 2021. 

2.  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 shall apply from 1 January 2019.  

Article 2 

This Decision is addressed to the Republic of Latvia.  

Done at Brussels, 

Article 3 

For the Council 
The President 

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