Proposal for a COUNCIL IMPLEMENTING DECISION authorising Croatia to introduce a special measure derogating from point (a) of Article 26(1) and Article 168 of Council Directive 2006/112/EC on the common system of value added tax
Date: 2018-11-06
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Croatia, VAT, aircraft, derogation from EU law, lease, motor car, provision of services, purchase, tax relief, vessel

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   EUROPEAN COMMISSION  Brussels, 6.11.2018 COM(2018) 726 final 2018/0375 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising Croatia to introduce a special measure derogating from point (a) of Article 26(1) and Article 168 of Council 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  22  December  2016,  Croatia  requested  to 
derogate  from  Articles  26(1)(a)  and  168  of  the  VAT  Directive  and  to  restrict  the  right  of 
deduction  of  VAT  regarding  the  purchase  and  lease  of  aircrafts,  vessels  and  personal  cars 
including the purchase of accessories for such goods as well as services supplied in relation 
thereto. After a number of discussions with the Commission Croatia modified its request and 
a new request was submitted and registered with the Commission on 17 September 2018. In 
accordance  with  Article  395(2)  of  the  VAT  Directive,  the  Commission  informed  the  other 
Member States by letter dated 21 September 2018 of the request made by Croatia. By letter 
dated 24 September 2018, the Commission notified Croatia 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 

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.  

Currently taxable persons in Croatia cannot deduct input VAT relating to personal cars unless 
the  personal  cars  are  used  for  drivers  training,  vehicles  testing,  repair  service,  economic 
activity of transporting passengers and goods, transport of deceased, rent and purchase for the 
purpose  of  resale.  Taxpayers  in  Croatia  continuously  require  the  abolishment  of  this 
restriction on the right of VAT deduction on the purchase and lease of personal cars and on 
the expenses related thereto. Croatia intends to modify its legislation and allow the deduction 
of input VAT relating to passenger cars not wholly used for business purposes. 

At the same time Croatia submits that it is complicated to determine the extent to which cars 
are used for private and for professional purposes. Croatia therefore considers that it would be 
appropriate  to  apply  the  fixed  percentage  for  the  VAT  deduction.  According  to  Croatia  the 
application of the fixed percentage limit for the VAT deduction will not  result in additional 
administrative burden and costs neither for businesses nor for tax authorities while the VAT 
deduction will be possible. The introduction of the VAT deduction will reduce the interest of 
taxpayers to procure goods and services related to passenger cars from persons performing a 
non-registered activity.  

Croatia therefore requests, based on Article 395 of the VAT Directive, to introduce a measure 
derogating  from  Articles  26(1)(a)  and  168  of  the  VAT  Directive  limiting  the  right  of 
deduction on passenger cars to a set percentage.  

1 

OJ L 347, 11.12.2006, p. 1. 

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Croatia conducted an analysis of the use of cars for business purposes which revealed that the 
business use should be estimated at approximately 40-60%. That is why Croatia submits that 
the 50% is the appropriate percentage limit.  

The restriction to  the right  of deduction should  apply to  the VAT paid  on the purchase  and 
lease  of  personal  cars  including  the  purchase  of  all  goods  as  well  as  services  supplied  in 
relation  thereto.  Passenger  cars  covered  are  considered  to  be  motor  vehicles  intended  for 
transport of persons with a maximum of eight seats in addition to the driver's seat.  

The personal cars used for drivers training, vehicles testing, repair service, economic activity 
of transporting passengers and goods, transport of deceased, rent and purchase for the purpose 
of resale are not covered by the percentage limit. 

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, taxpayers will be able to deduct 50% of VAT on passenger cars that 
they use for private and business purposes whereby they would not be additionally burdened 
by keeping records. The tax authorities would have a simplified VAT collection procedure.  

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 Croatia and concerns only this Member State.  

• 

Collection and use of expertise 

There was no need for external expertise.  

• 

Impact assessment 

The proposal responds to the request made by Croatia who would like to amend its legislation 
and allow for VAT deduction on the business use of passenger cars. Since it is complicated to 
determine the extent to which cars are used for private and for professional purposes, Croatia 
requested  to  apply  the  fixed  percentage  limit  of  50%.  The  special  measure  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.  

Croatia will allow the deduction of VAT which  was  not  deductible until  now. The measure 
will therefore have an impact on the Croatian state budget. The VAT revenues will be reduced 
by  approximately  400 million  per  year  based  on  data  from  2015,  i.e.  0.9%  of  total  VAT 
revenue3.  

4. 

BUDGETARY IMPLICATIONS 

The proposal will have no negative impact on the Union’s own resources accruing from VAT. 

5. 

OTHER ELEMENTS 

The proposal includes a sunset clause;  an automatic time limit which is set at 31 December 
2021. 

In case Croatia 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. 

3 

Study and Reports on the VAT Gap in the EU-28 Member States: 2018 Final Report; Table 3.11., p.32.  

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2018/0375 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising Croatia to introduce a special measure derogating from point (a) of Article 
26(1) and Article 168 of Council 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) 

Article  168  of  Directive  2006/112/EC  establishes  a  taxable  person's  right  to  deduct 
value  added  tax  (VAT)  charged  on  supplies  of  goods  and  services  received  by  that 
person for the use of that person's 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. 

By  letter  registered  with  the  Commission  on  22  December  2016,  Croatia  requested 
authorisation to derogate from the provisions of Directive 2006/112/EC governing the 
right to deduct input tax in relation to the purchase and leasing of aircrafts, vessels and 
personal cars including the purchase of accessories for such goods as well as services 
supplied  in  relation  thereto.  After  a  number  of  discussions  with  the  Commission 
Croatia  submitted  a  modified  request  limited  to  passenger  cars  which  was  registered 
with the Commission on 17 September 2018.  

The Commission  transmitted the request  of Croatia to  other Member States  by letter 
dated  21  September  2018.  By  letter  dated  24  September  2018,  the  Commission 
notified Croatia that it had all the information it considered necessary for the appraisal 
of the request. 

Taxable persons in Croatia cannot deduct VAT related to passenger cars used partially 
for business purposes. Croatia intends to modify its legislation and allow the deduction 
of input VAT relating to passenger cars. 

Croatia claims that the extent to which cars are used for private and for professional 
purposes is often difficult to identify accurately and even where it is possible, this is 
often burdensome. Croatia therefore considers that it would be appropriate to apply the 
fixed percentage for the VAT deduction. Based on estimations Croatia submits that the 
50% limit is appropriate.  

1 

OJ L 347, 11.12.2006 , p. 1.  

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(6) 

(7) 

(8) 

(9) 

According  to  Croatia  the  application  of  the  fixed  percentage  limit  for  the  VAT 
deduction  will  not  result  in  additional  administrative  burden  and  costs  neither  for 
businesses  nor  for  tax  authorities  while  the  VAT  deduction  will  be  possible.  The 
introduction  of  the  VAT  deduction  will  reduce  the  interest  of  taxpayers  to  procure 
goods and services related to passenger cars from persons performing a non-registered 
activity.  

Croatia therefore requested, based on Article 395 of the VAT Directive, to introduce a 
special measure derogating from point (a) of Article 26(1) and Article 168 of Directive 
2006/112/EC limiting the right of deduction on passenger cars to a set percentage.   

The restriction to the right of deduction should apply to VAT paid on the purchase and 
lease  of  personal  cars  including  the  purchase  of  all  goods  and  services  supplied  in 
relation thereto. Passenger cars covered are considered to be motor vehicles intended 
for transport of persons with a maximum of eight seats in addition to the driver's seat.  

The  special  measure  is  designed  to  simplify  the  procedure  for  charging  tax  and  to 
counter  VAT  evasion  while  allowig  the  VAT  deduction  on  passengers  cars  used 
partially for business purposes. Given a potential positive impact for both businesses 
and administrations, it is appropriate to grant the special measure.  

(10)  The special measure 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.  

(11) 

In the event that Croatia considers an extension of the authorisation beyond 2021 to be 
necessary, it should submit a request for an extension to the Commission by 31 March 
2021  accompanied  by  a  report  which  should  include  a  review  of  the  percentage 
applied.  

(12)  The  special  measure  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  Article  168  of  Directive  2006/112/EC,  Croatia  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, Croatia 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. 

The expenditure referred to in Article 1 shall cover the purchase and leasing of passenger cars 
including the purchase of all goods and services supplied in relation thereto.  

Article 3 

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The  Decision  should  only  apply  to  motor  vehicles  intended  for  transport  of  persons  with  a 
maximum of eight seats in addition to the driver's seat.  

Article 4 

Articles 1 and 2 shall not apply to: 

Article 5 

– 

– 

(a)  vehicles  used  for  drivers  training,  vehicles  testing,  repair  service,  economic 
activity of transporting passengers and goods, transport of deceased, rent; 

(b) vehicles purchased for the purpose of resale.  

Article 6 

This Decision shall apply from 1 January 2019 until 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 the Republic of Croatia.  

Done at Brussels, 

Article 7 

For the Council 
The President 

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