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: 2021-10-05
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Latvia, VAT, derogation from EU law, motor car, tax relief

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   EUROPEAN COMMISSION  Brussels, 5.10.2021  COM(2021) 606 final 2021/0314 (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  (‘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 21 April 2021, 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 expenditure on certain passenger cars not wholly used 
for  business  purposes.  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 10 June 2021 of the request made by Latvia. The Commission 
notified  Latvia  by  letter  dated  14  June  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. 

Latvia  is  currently  authorised  on  the  basis  of  Council  Implementing  Decision  (EU) 
2015/24292 to limit to 50% the right of deduction of VAT paid on the purchase, leasing, intra-
Community acquisition and importation of specified passenger cars, and expenditure related 
to  the maintenance, repair and fuel  for such cars, when those passenger cars are  not  wholly 
used for business purposes. The special measure also relieves taxable persons from having to 
treat  the  non-business  use  of  such  passenger  cars  as  a  supply  of  services.  Passenger  cars 
covered by the special measure are those with a maximum authorised weight not exceeding 3 
500 kilograms and having not more than eight seats in addition to the driver's seat. 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; 

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OJ 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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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.  The  validity  of  Council  Implementing  Decision  (EU)  2015/2429  was  extended  by 
Council Implementing Decision (EU) 2018/19213 until 31 December 2021.  

The  present  request  by  Latvia  to  prolong  further  the  special  measure  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(2) of Council Implementing Decision (EU) 2015/2429. Latvia considers that the 
conditions  for  the  application  of  the  special  measure  continue  to  apply  and  that  the  applied 
50% limit remains appropriate.  

Latvia  confirms  that  the  special  measure  allows  administrative  burden  to  be  eased  for 
taxpayers  and  for  the  tax  administration  and  limits  the  evasion  of  VAT  through  incorrect 
record  keeping  of  journeys  made  in  connection  with  business  activities  and  incorrectly 
completed VAT returns. According to the data submitted by Latvia, in 2019 microenterprises 
and  SMEs  accounted  for  almost  99.7%  of  the  economically  active  enterprises  which 
complicates  the  task  of  the  tax  authorities  when  verifying  the  business  and  private  use  of 
passenger cars. As of 1 January 2021 the total number of registered traders in Latvia with one 
or two passenger cars was 21 739 or 82% of all registered traders who registered passenger 
cars. Since microenterprises and SMEs make up 99.7% of all operators, Latvia maintains that 
most of the passenger cars are used for private purposes. According to the data provided, in 
2020  87.6%  of  all  passenger  cars  belonging  to  registered  traders  were  used  not  just  for 
business but also for private purposes.  

Given  the  positive  impact  of  the  special  measure  on  the  administrative  burden  of  taxpayers 
and of tax authorities, it is proposed to grant the 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 (Estonia4, Hungary5, Croatia6, Poland7, Italy8 and Romania9).  

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Council  Implementing  Decision  (EU)  2018/1921  of  4  December  2018  amending  Implementing 
Decision  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) 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) 2018/1493 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, 8.10.2018, p. 44–46. 
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. 

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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  deduct10,  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 collecting 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  and  would  prevent  tax  evasion  inter  alia 
through incorrect record keeping and incorrectly completed VAT returns. 

• 

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 Latvia and concerns only this Member State.  

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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. 
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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There was no need for external expertise. 

• 

Impact assessment 

The proposal is designed to simplify the procedure for charging tax by removing the need for 
taxable  persons  to  keep  records  on  the  private  use  of  specified  passenger  cars,  and,  at  the 
same  time,  prevent  VAT  evasion  through  incorrect  record  keeping.  The  proposed  measure 
has,  therefore,  a  potential  positive  impact  for  both  businesses  and  tax  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 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 Latvia would consider another extension of the special 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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2021/0314 (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 tax1, and in particular Article 395(1), first subparagraph, thereof, 

Having regard to the proposal from the European Commission, 

Whereas:  

(1) 

(2) 

(3) 

(4) 

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Articles 168 and 168a of Directive 2006/112/EC establish a right for taxable persons 
to deduct value added tax (VAT) charged on supplies to them of goods  and services 
that  are  used  for  the  purposes  of  their  taxed  transactions.  Pursuant  to  Article  26(1), 
point (a), of that Directive, the use of business assets for private use of taxable persons 
or their staff or, more generally, for purposes other than those of their business is to be 
treated as a supply of services. 
Council  Implementing  Decision  (EU)  2015/24292  authorised  Latvia,  until  31 
December 2018, to restrict to 50% the right of deduction of the VAT on the purchase, 
leasing,  intra-Community  acquisition  and  importation  of  passenger  cars  with  a 
maximum authorised weight not exceeding 3 500 kilograms and having not more than 
eight  seats  in  addition  to  the  driver's  seat,  as  well  as  on  expenditure  related  to 
maintenance,  repair,  and  fuel  of  such  passenger  cars.  The  authorisation  also  relieves 
taxable persons from having to treat the non-business use of such passenger cars as a 
supply of services. 
Council  Implementing  Decision  (EU)  2018/19213  extended 
Implementing Decision 2015/2429 to 31 December 2021. 

the  validity  of 

By letter of 21 April 2021, Latvia submitted a request to the Commission to continue 
to apply the special measure derogating from Article 26(1), point (a), and Articles 168 
and  168a  of  Directive  2006/112/EC  in  order  to  restrict  the  right  of  deduction  in 

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). 
Council  Implementing  Decision  (EU)  2018/1921  of  4  December  2018  amending  Implementing 
Decision  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). 

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(5) 

(6) 

(7) 

(8) 

(9) 

relation to expenditure on certain passenger cars not wholly used for business purposes 
(‘the request’).  

In  accordance  with  Article  395(2),  second  subparagraph,  of  Directive  2006/112/EC, 
the Commission  transmitted the request  to  the other Member States, by letters of 10 
June 2021. By letter of  14 June 2021, 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,  namely  tax audit experience  and statistical 
data relating to private use of passengers cars, Latvia claims that the limit of 50% is 
still justifiable and remains appropriate. 

Given the positive impact of the special measure on the administrative burden of the 
taxpayers and of tax authorities, Latvia should be authorised to continue to apply the 
special measure. 

The  extension  of  the  special  measure  should  be  limited  in  time  to  allow  for  an 
evaluation of its effectiveness and of the appropriate percentage. 

In  the  event  that  Latvia  considers  that  a  further  extension  of  the  special  measure  is 
necessary  beyond  2024,  it  should  submit  to  the Commission  a  report  that  includes  a 
review  of  the  percentage  applied,  together  with  the  extension  request,  by  31  March 
2024. 

(10)  The  special  measure  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. 

(11) 

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

HAS ADOPTED THIS DECISION:  

Article 1 

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

'Article 6 

1. This Decision shall apply from 1 January 2016. It shall expire on 31 December 2024. 

2.  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 the Republic of Latvia. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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