Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/1493 authorising Hungary 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: 2021-08-19
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, 19.8.2021  COM(2021) 482 final 2021/0274 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/1493 authorising Hungary 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  (‘the  VAT  Directive1’),  the  Council,  acting  unanimously  on  a 
proposal  from  the Commission,  may authorise any Member State to  apply special measures 
derogating  from  the  provisions  of  this  Directive,  in  order  to  simplify  the  procedure  for 
charging VAT or to prevent certain forms of tax evasion or avoidance. 

By  letter  registered  with  the  Commission  on  25  February  2021,  Hungary  requested  an 
authorisation  to  continue  to  apply  a  measure  derogating  from  point  (a)  of  Article  26(1)  and 
Articles 168 and 168a of the VAT Directive and to restrict the right of deduction of VAT on 
the leasing of certain passenger cars not wholly used for business purposes. The request was 
accompanied by  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  April  2021  of  the  request  made  by  Hungary.  The 
Commission  notified  Hungary  by  letter  dated  8  April  2021  that  it  had  all  the  information 
necessary to consider the request. 

1. 

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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. Point (a) of paragraph 
1  of  Article  26  of  that  Directive  contains  a  requirement  to  account  for  VAT  when  goods 
forming  part  of  the  assets  of  a  business  are  put  to  use  for  private  purposes  of  the  taxable 
person or for that of his staff or, more generally, for purposes other than those of his business, 
where  the  VAT  on  such  goods  was  wholly  or  partly  deductible.  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.  

Pursuant to Article 395 of the VAT Directive, Member States may apply measures derogating 
from the provisions of the VAT Directive to simplify the procedure for collecting VAT or to 
prevent certain forms of tax evasion or avoidance if they have been authorised by the Council. 

Hungary  is  currently  authorised  on  the  basis  of  Council  Implementing  Decision  (EU) 
2018/14932  to  limit  to  50%  the  right  to  deduct  the  VAT  paid  on  expenditure  eligible  for 
deduction in respect of the leasing of passenger cars which are not wholly used for business 
purposes  and  to  relieve  taxable  persons  from  having  to  treat  the  non-business  use  of  such 
passenger  cars  as  a  supply  of  services.  Passenger  cars  covered  by  the  measure  are  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 are excluded from the restriction 

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OJ 347, 11.12.2006, p.1.  
Council Implementing Decision (EU) 2018/1493 of 2 October 2018 authorising Hungary 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 252/46, 8.10.2018, p. 44. 

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to the right of deduction of VAT and are treated under the normal rules. Taxable persons who 
do not wish to apply the 50% deduction limit and who wish to apply the VAT deduction up to 
the proportion of actual business use are allowed to do so provided they dispose of detailed 
evidence on the business use of leased passenger cars. This Council Implementing Decision 
shall expire on 31 December 2021. 

Hungary has requested to prolong the authorisation to limit the initial deduction to a set flat 
percentage rate and in turn to relieve the business from accounting for tax on the private use. 
Hungary informed the Commission that the grounds for the prolongation of the measure are 
largely  the  same  as  described  in  the  previous  request.  Hungary  confirms  that  the  special 
measure  has  delivered  positive  results  for  both  companies  and  tax  authorities,  and  the 
rationale  for  the  derogation  continues  to  apply.  In  accordance  with  Article  5  of  Council 
Implementing  Decision  2018/1493,  Hungary  has  also  presented  a  report  on  the  percentage 
limit  set  for  the  VAT  deduction.  Hungary  considers  that  the  applied  50  percentage  limit 
remains appropriate. According to the data submitted, the estimated extent of private use of 
leased company cars ranges from around 43% to 53% during the period 2016-2019. Since the 
estimate  is  based  on  indirect  evidence  and  assumptions  and  could  thus  be  overestimated, 
Hungary  considers  that  the  50%  input  VAT  deduction  limit  is  the  most  appropriate. 
Moreover, experience from inspections by the tax authority has shown that the vast majority – 
roughly  90-95%  –  of  taxable  persons  inspected  apply  the  mandatory  50%  deductible 
proportion. According to Hungary, the reason is, clearly, that they are thereby relieved of the 
obligation to keep itemised records, and that the rate of 50% private use is sufficiently close to 
practice.  

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  2024.  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 2024. 

• 

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 (Estonia3, Latvia4, Croatia5, Poland6, Italy7 and Romania8).  

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Council Implementing Decision (EU) 2017/1854 of 10 October 2017 amending Implementing Decision 
2014/797/EU  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 265, 14.10.2017, p. 17–18. 
Council  Implementing  Decision  (EU)  2018/1921  of  4  December  2018  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, OJ L 311, 7.12.2018, p. 36–37. 
Council Implementing Decision (EU) 2018/1994 of 11 December 2018 authorising Croatia to introduce 
a special measure derogating from point (a) of Article 26(1) and Article 168 of Directive 2006/112/EC 
on the common system of value added tax, OJ L 320, 17.12.2018, p. 35–37. 
Council  Implementing  Decision  (EU)  2019/1594  of  24  September  2019  amending  Implementing 
Decision 2013/805/EU authorising the Republic of Poland to introduce measures derogating from point 
(a) of Article 26(1) and Article 168 of Directive 2006/112/EC on the common system of value added 
tax, OJ L 248, 27.9.2019, p. 71–72. 
Council Implementing Decision (EU) 2019/2138 of 5 December 2019 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, OJ L 324, 13.12.2019, p. 7–8. 

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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  deduct9,  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 the procedure for charging the tax 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. 

• 

Choice of the instrument 

Proposed instrument: Council Implementing Decision. 

Under Article 395 of the VAT Directive, a derogation from the common VAT provisions 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. 

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Council  Implementing  Decision  (EU)  2020/1262  of  4  September  2020  amending  Implementing 
Decision  2012/232/EU  authorising  Romania  to  apply  measures  derogating  from  Article  26(1)(a)  and 
Article 168 of Directive 2006/112/EC on the common system of value added tax, OJ L 296, 10.09.2020, 
p. 6. 
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 is designed to simplify the procedure for charging the tax by removing the need 
for taxable persons to keep records on the private use of leased business cars, and, at the same 
time, to prevent certain form of VAT evasion through incorrect record keeping. The proposed 
tax 
measure  has, 
administrations.  The  solution  has  been  identified  by  Hungary  as  a  suitable  measure  and  is 
comparable to other past and present derogations. 

impact  for  both  businesses  and 

therefore,  a  potential  positive 

4. 

BUDGETARY IMPLICATIONS 

The proposal will not adversely affect the Union's own resources from VAT. 

5. 

OTHER ELEMENTS 

The proposal is limited in time and includes a sunset clause set at 31 December 2024.  

In case Hungary would consider another extension of the derogating measure beyond 2024, 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 2024. 

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2021/0274 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision (EU) 2018/1493 authorising Hungary 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 tax1, and in particular Article 395(1) thereof, 

Having regard to the proposal from the European Commission, 

Whereas: 

(1) 

(2) 

(3) 

(4) 

Council Implementing Decision (EU) 2018/14932, authorised Hungary to apply, until 
31 December 2021, a special measure consisting, on the one hand, in limiting to 50% 
the right to deduct value added tax (‘VAT’) on expenditure related to passenger cars 
not  wholly  used  for  business  purposes,  by  way  of  derogation  from  Articles  168  and 
168a of Directive 2006/112/EC, and, on the other hand, in not treating 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  that  Implementing  Decision,  by  way  of 
derogation from Article 26(1), point (a), of that Directive (‘the special measure’).  

By  letter  registered  by  the  Commission  on  25  February  2021,  Hungary  requested  an 
authorisation to continue to apply the special measure (‘the extension request’).  

In  accordance  with  Article  395(2),  second  subparagraph,  of  Directive  2006/112/EC, 
the  Commission  transmitted  the  extension  request  to  the  other  Member  States  by 
letters  dated  7  April  2021.  By  letter  dated  8  April  2021,  the  Commission  notified 
Hungary that it had all the information necessary to consider the request. 

In  accordance  with  Article  5  of  Implementing  Decision  2018/1493,  Hungary 
submitted,  together  with  the  extension  request,  a  report  including  the  review  of  the 
percentage  set  for  the  VAT  deduction.  Based  on  currently  available  information, 
namely  tax  audit  experience  and  statistical  data  relating  to  private  use  of  passengers 
cars, Hungary confirms in its extension request that the limit of 50% is still justifiable 
and  remains  appropriate.  Moreover,  the  special  measure  effectively  reduced  the 
administrative  burden  of  businesses  and  of  tax  authorities.  Hungary  should  therefore 
be authorised to continue to apply this special measure.  

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2 

OJ L 347, 11.12.2006, p. 1.  
Council Implementing Decision (EU) 2018/1493 of 2 October 2018 authorising Hungary 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 252/46, 8.10.2018, p. 44). 

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(5) 

(6) 

(7) 

The  extension  of  the  special  measure  should  be  limited  in  time  to  allow  for  an 
evaluation  of  its  effectiveness  and  of  the  appropriate  percentage.  Hungary  should 
therefore be authorised to continue to apply the special measure for a limited period, 
until 31 December 2024. 

In the event that Hungary considers that an extension of the authorisation beyond 2024 
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 2024. 

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. 

(8) 

Implementing Decision (EU) 2018/1493 should therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Article 1 

Article 5 of Implementing Decision (EU) 2018/1493 is replaced by the following: 

'Article 5 

This Decision shall apply from 1 January 2019 until 31 December 2024. 

Any  request  for  the  extension  of  the  authorisation  provided  for  in  this  Decision  shall  be 
submitted to the Commission by 31 March 2024 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 2 

For the Council 
The President 

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