Proposal for a COUNCIL IMPLEMENTING DECISION amending Decision 2007/441/EC authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) and 168 of Directive 2006/112/EC on the common system of value added tax
Date: 2019-10-16
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Italy, VAT, derogation from EU law, motor vehicle, tax relief

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   EUROPEAN COMMISSION  Brussels, 16.10.2019  COM(2019) 476 final 2019/0229 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Decision 2007/441/EC authorising the Italian Republic to apply measures derogating from Articles 26(1)(a) and 168 of Directive 2006/112/EC on the common system of value added tax  
 
EXPLANATORY MEMORANDUM 

Pursuant  to  Article  395(1)  of  Council  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  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 12  April 2019,  Italy  requested an extension of 
the derogation from Articles 168 and 26(1)(a) of the VAT Directive that it currently applies. 
In  particular,  Italy  asks  for  an  authorisation  to  continue  to  derogate  from  Article  168  by 
limiting  to  40% the  right  to  deduct  input  VAT  charged  on  expenditure  related  to  motorised 
road  vehicles  not  wholly  used  for  business  purposes.  In  addition,  Italy  requests  an 
authorisation to continue to derogate from Article 26(1)(a) by exempting from VAT the use 
for private purposes of vehicles included in the assets of a taxable person’s business, where 
such vehicles are subject to a restriction of the right to deduct.  

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member States by letter dated 13 May 2019 on the request made by Italy. By letter dated 14 
May  2019,  the  Commission  notified  Italy  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 of goods or services used for the purposes of taxed transactions in the 
Member  State  where  such  transactions  take  place.  Article  26(1)(a)  of  the  same  directive 
stipulates that the use for private purposes of goods forming part of the assets of a business 
shall be considered as a supply of services for consideration if the VAT on such goods was 
eligible for deduction. 

In the case of motorised road vehicles forming part of the assets of a business, the application 
of the above provisions encounters a number of practical difficulties, in particular because it is 
not  easy  to  distinguish  between  private  and  business  use  of  those  vehicles.  In  cases  where 
records  about  the  use  of  such  vehicles  are  kept,  they  add  an  additional  burden  to  both 
businesses and administrations in  terms  of maintaining  and controlling them. Moreover, the 
application of those provisions may increase the risk of VAT abuse or fraud attempts, notably 
through a possible underreporting of the private use of such vehicles. 

Italy is currently authorised to derogate from Article 168 of the VAT Directive by limiting to 
40% the right  to  deduct  VAT on the purchase of a vehicle, including contracts  of assembly 
and  the  like,  manufacture,  intra-Community  acquisition,  importation,  leasing  or  hire, 
modification,  repair  or  maintenance,  and  expenditure  on  supplies  or  services  performed  in 
relation  to  vehicles  and  their use, including lubricants  and  fuel,  provided that the vehicle in 
question  is  not  used  exclusively  for  business  purposes.  The  derogation  covers  all  motor 
vehicles but agricultural or forestry tractors, normally used for carrying persons or goods by 
road  and  having  a  total  maximum  weight  lower  than  3.5  tonnes  and  fewer  than  nine  seats, 
including the driver’s seat.  In contrast,  it does not  cover  expenditure relating  entirely to the 
taxable  person’s  business.  This  would  be  the  case  with  vehicles  that  belong  to  the  taxable 

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OJ L 347, 11.12.2006, p. 1. 

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person’s stock-in-trade in the exercise of their activity, and vehicles used as taxis, as well as 
vehicles used for instruction by driving schools, and those used for hire or leasing or by sales 
representatives. 

Likewise,  Italy  is  authorised  to  derogate  from  Article  26(1)(a)  of  the  VAT  Directive  by 
exempting from VAT the use for private purposes of vehicles forming part of the assets of a 
taxable person’s business where those vehicles are covered by the above derogation.  

The  authorisation  for  the  derogating  measures  mentioned  above  was  first  granted  by  the 
Council  by  means  of  Decision  2007/441/EC  of  18  June  20072  until  31  December  2010. 
Subsequently, the derogating measures were prolonged three times following Italy’s request: 
Council Implementing Decision 2010/748/EU of 29 November 20103 extended them for the 
period  1  January  2011  until  31  December  2013;  Council  Implementing  Decision 
2013/679/EU of 15 November 20134 for the period 1 January 2014 until 31 December 2016; 
last,  Council  Implementing  Decision  2016/1982/EU  of  8  November  20165  for  the  period  1 
January 2017 until 31 December 2019.  

The  present  request  from  Italy  to  prolong  further  the  derogation  until  31  December  2022  is 
based  on  the  same  grounds  as  those  presented  in  the  previous  requests.  The  request  is 
accompanied by a report including a review of the percentage limitation applied on the right 
of deduction, as required by Article 6 of Decision 2007/441/EC. 

The  information  provided  by  Italy  demonstrates  that  the  current  rate  of  40%  is  still 
appropriate because it corresponds  to  the current  circumstances of the  Italian economy with 
regard  to  the  ratio  of  business  and  private  use  of  the  motorised  road  vehicles  concerned. 
According  to  Italy’s  report,  the  Italian  economy  is  dominated  by  microenterprises,  which 
represent  99%  of  Italian  firms  and  amount  to  some  5.2  million  taxable  persons.  This  is 
revealing  about  the  difficulty  for  the  authorities  to  verify  the  private  and  business  use  of 
motorised  vehicles  owned  by  such  microenterprises.  The  predominance  of  microenterprises 
also  justifies  the  adoption  of  simplification  measures  to  ensure  compliance  with  tax 
obligations. 

Italy  reports  that  those  microenterprises  have  minimal  turnover  and  in  most  cases  only  one 
employee, thus it can be assumed that the vehicles concerned are used for private purposes to 
a  significant  extent.  It  is  estimated  that  the  average  rate  of  private  use  by  Italian  taxable 
persons of corporate vehicles  subject  to  the derogation is  around 60%. This  is  explained by 
the preponderance of microenterprises, which own most of the corporate vehicles circulating 
in Italy. Moreover, larger firms (with a turnover of above EUR 5 million) represent only 1% 
of the total, and allocate most of their corporate vehicles to employees or directors as a fringe 
benefit. In this regard, it is recalled that the payment of the tax on these fringe benefits falls to 
the  employee  (or  director)  who  enjoys  that  benefit  and  who  therefore  lawfully  uses  the 
company car for personal and family purposes throughout the year. According to Italy, non-
business use of vehicles of larger companies also amounts to more than 50%. 

To justify the appropriateness of the percentage of 40%, Italy further refers to the judgment of 
the Court of Justice of the European Union in Case C-228/05 Stradasfalti6, which held that a 

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6 

OJ L 165, 27.6.2007, p. 33. 
OJ L 318, 4.12.2010, p. 45. 
OJ L 316, 27.11.2013, p. 37. 
OJ L 305, 12.11.2016, p. 30. 
Judgment of the Court of 14 September 2006 in Case C-228/05, Stradasfalti Srl v Agenzia delle Entrate 
- Ufficio di Trento, ECLI:EU:C:2006:578. 

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restriction  to  the  right  to  deduct  for  expenditure  related  to  motorised  vehicles  previously  in 
force  in  Italy  did  not  comply  with  EU  legislation.  As  a  result  of  this  judgment,  Italy  was 
obliged  to  establish  a  procedure  for  filing  claims  for  the  reimbursement  of  non-deducted 
VAT. The Italian legislator decided that taxpayers could claim reimbursement in two different 
ways: either through an “analytical filing” procedure, supplying evidence that the percentage 
rate  of  the  deduction  for  which  reimbursement  was  claimed  was  appropriate,  or  through  an 
“online  filing”  procedure,  using  a  40%  flat-rate  reimbursement.  Italy  states  that  95%  of  the 
claims  for  reimbursement  followed  the  “online  filing”  procedure.  In  its  view,  this  is  a 
confirmation  that  the  interested  parties  themselves  acknowledge  the  suitability  of  this 
percentage rate for the economic landscape of Italy.  

It is true that establishing a distinction between private and business use of corporate vehicles 
would entail onerous and disproportionate costs on keeping appropriate records as compared 
to  the  potential  benefits,  notably  as  regards  sole  traders  and  microenterprises.  It  could  also 
give  rise  to  legal  disputes  between  the  tax  authorities  and  taxable  persons  resulting  in 
additional costs. 

The  percentage  rate  of  40%  appears  to  reflect  adequately  the  actual  business  use  of  such 
vehicles.  Indeed,  applying  a  higher  or  a  lower  rate  would  lead  to  excessively  high 
discrepancies  between  the  set  rate  and  the  actual  use  of  vehicles  for  business  activities  and 
private purposes. This rate is similar to the percentage used in other Member States.  

The measures adopted by Decision 2007/441/EC are considered as a satisfactory compromise 
between  the  adopted  rules  and  expensive,  time-consuming  and  largely  ineffective  record 
keeping  with  the  view  to  confirming  that  a  particular  vehicle  has  indeed  been  used  for 
business activities.  

The derogating measures are not expected to affect significantly the overall amount of the tax 
revenue  of  Italy  collected  at  the  stage  of  the  final  consumption.  Likewise,  they  are  not 
expected to adversely affect the Union’s own resources accruing from VAT.  

In  the  light  of  the  above,  and  given  that  the  EU  legal  framework  and  the  factual  situation 
remain  unchanged,  the  requested  extension  of  the  derogating  measures  until  31  December 
2022 appears to be justified. Therefore, it is proposed that the request be granted. Should Italy 
wish  to  ask  for  a  further  extension  beyond  2022,  it  shall  submit  an  extension  request  by  1 
April 2022, accompanied by a report including a review of the percentage restriction applied. 

• 

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  then,  it  authorises  Member  States  to  maintain 
exclusions that were in place under national laws on 1 January 1979. On this basis, there is a 
number of ‘stand still’ provisions restricting the right to deduct VAT in relation to corporate 
motor vehicles. 

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Previous initiatives to establish rules on which categories of expenditure may be subject to a 
restriction  on the right  to  deduct  have failed7. Until those rules are harmonised at  EU level, 
derogations such the present one are considered as appropriate. 

The proposed measures are therefore consistent with the provisions of the VAT Directive. 

2. 

• 

LEGAL BASIS, SUBSIDIARITY AND PROPORTIONALITY 

Legal basis 

Article 395 of the VAT Directive is the only possible legal basis. 

• 

Subsidiarity (for non-exclusive competence)  

Considering the provision of the VAT Directive on which it is based, the proposal falls under 
the exclusive competence of the European Union.  Hence, 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 40% restriction would simplify 
the  VAT  collection  procedure  and  would  prevent  tax  evasion  inter  alia  through  incorrect 
record keeping. 

• 

Choice of the instrument 

The instrument proposed is a Council Implementing Decision. 

Under Article 395 of the VAT Directive, a derogation from the common VAT rules is only 
possible upon authorisation by the Council, which is 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 

No stakeholder consultation has been conducted. The present proposal is based on a request 
made by Italy and concerns only this particular Member State. 

• 

Collection and use of expertise 

There was no need for external expertise.  

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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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• 

Impact assessment 

The proposal aims to simplify the procedure for collecting VAT and to prevent VAT evasion. 
It  has,  therefore,  a  potential  positive  impact  for  both  businesses  and  administrations.  The 
derogating  measures  have  been  identified  by  Italy  as  the  most  appropriate  solution.  The 
measures  are  comparable  to  other  past  and  present  derogations  granted  to  other  Member 
States.  

• 

Fundamental rights 

The proposal does not have any consequences for the protection of fundamental rights. 

4. 

BUDGETARY IMPLICATIONS 

The proposal will not have a negative impact on the EU budget.  

5. 

• 

OTHER ELEMENTS 

Implementation plans and monitoring, evaluation and reporting arrangements 

The proposal includes a sunset clause which is set at 31 December 2022. 

In case Italy considers a further extension of the derogating measures beyond 2022, it should 
submit to the Commission an extension request accompanied by a report including a review 
of the percentage limit no later than 1 April 2022.  

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2019/0229 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Decision 2007/441/EC authorising the Italian Republic to apply measures 
derogating from Articles 26(1)(a) and 168 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 tax8, and in particular the first subparagraph of Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

(5) 

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Article  168  of  the  Directive  2006/112/EC  establishes  a  right  for  taxable  persons  to 
deduct value added tax (VAT) charged on supplies of goods and services that they use 
for the purposes of their taxed transactions. Article 26(1)(a) of that Directive treats the 
use of business  assets  by  taxable persons or their staff for private purposes or, more 
generally,  for  purposes  other  than  those  of  their  business  as  a  supply  of  services  for 
consideration. 
Council Decision 2007/441/EC9 authorises Italy to limit the right under Article 168 of 
Directive 2006/112/EC to deduct VAT to 40% in the case of VAT charged on certain 
expenditure on certain motorised road vehicles not wholly used for business purposes. 
For vehicles subject to that 40% limit, Italy is required to relieve taxable persons from 
having to treat their use for private purposes as a supply of services for consideration 
in accordance with Article 26(1)(a) of Directive 2006/112/EC. Decision 2007/441/EC, 
which has been extended several times, is due to expire on 31 December 2019. 

By  letter  registered  with  the  Commission  on  12  April  2019,  Italy  requested 
authorisation  to  continue  to  apply  the  derogating  measures  authorised  by  Decision 
2007/441/EC (‘the derogating measures’) for a further period until 31 December 2022. 

By  letter  dated  13  May  2019,  the  Commission  informed  the  other  Member  States, 
pursuant  to  the  second  subparagraph  of  Article  395(2)  of  Directive  2006/112/EC,  of 
the request that had been made by Italy. By letter dated 14 May 2019, the Commission 
notified Italy that it had all the information necessary to consider the request.  

Alongside the request, Italy submitted a report to the Commission, in accordance with 
Article  6  of  Decision  2007/441/EC,  including  a  review  of  the  percentage  limitation 
applied on the right to deduct VAT. Based on the information currently available, Italy 
maintains that a rate of 40% is still justified. Italy also maintains that suspending the 

OJ L 347, 11.12.2006, p. 1. 
Council  Decision  2007/441/EC  of  18  June  2007  authorising  the  Italian  Republic  to  apply  measures 
derogating from Articles 26(1)(a) and 168 of Directive 2006/112/EC on the common system of value 
added tax (OJ L 165, 27.6.2007, p. 33). 

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requirement to account for VAT on the private use of a motor vehicle subject to that 
40% limit is still necessary to ensure that the measure is complete and consistent. This 
would prevent double taxation. Those derogating measures are justified by the need to 
simplify the procedure for collecting VAT and to prevent  tax evasion  resulting from 
incorrect record-keeping and false tax declarations. 

Extension of the derogating measures should be limited to the time needed to evaluate 
the effectiveness of the derogating measures and the appropriateness of the percentage. 
Italy should therefore be authorised to continue to apply the derogating measures until 
31 December 2022. 

A deadline should be set for requesting authorisation for any further extension of the 
derogating measures beyond 2022 which Italy may consider necessary. Italy should be 
required to submit a report alongside any such extension request, including a review of 
the percentage restriction applied on the right to deduct VAT.  

The derogating measures will only have a negligible effect  on the overall amount of 
tax  collected  at  the  stage  of  final  consumption  and  will  not  adversely  affect  the 
Union’s own resources accruing from VAT. 

(6) 

(7) 

(8) 

(9) 

Decision 2007/441/EC should be therefore amended accordingly, 

HAS ADOPTED THIS DECISION:  

Decision 2007/441/EC is amended as follows: 

(1) 

Article 6 is replaced by the following: 

Article 1 

‘Article 6 

Any request for authorisation to extend the derogating measures authorised by this Decision 
shall be submitted to the Commission by 1 April 2022. The request shall be accompanied by a 
report including a review of the percentage restriction applied on the right to deduct VAT on 
the basis of this Decision.’; 

(2) 

Article 7 is replaced by the following: 

This Decision shall expire on 31 December 2022.’.  

‘Article 7 

This Decision is addressed to the Italian Republic. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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