Proposal for a COUNCIL IMPLEMENTING DECISION authorising Estonia to apply a measure derogating from Article 26(1), point (a), and Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2021-10-13
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Estonia, VAT, derogation from EU law, motor car, motor vehicle

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   EUROPEAN COMMISSION  Brussels, 13.10.2021  COM(2021) 626 final 2021/0322 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION authorising Estonia to apply a measure derogating from Article 26(1), point (a), 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 authorize 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  February  2021,  Estonia  requested  an 
authorisation to apply a measure derogating from the overall principles governing the right of 
deduction of input VAT in relation to expenditure connected with passenger cars not wholly 
used for business purposes.  

In accordance with Article 395(2) of the VAT Directive, the Commission informed the other 
Member States by letter dated 19 March 2021 of the request made by Estonia. By letter dated 
23 March 2021, the Commission notified Estonia 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 

Articles 168 and 168a of the VAT Directive provide that a taxable person is entitled to deduct 
the 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. 

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. 

Estonia has been authorised on the basis of Council Implementing Decision 2014/797/EU2 to 
restrict  to  50  %  the  right  to  deduct  VAT  on  the  purchase,  leasing,  intra-Community 
acquisition,  and  importation  of  certain  passenger  cars  as  well  as  expenditure  related  thereto 
when  those  cars  are  not  wholly  used  for  business  purposes.  The  validity  of  Council 
Implementing  Decision  2014/797/EU  was  extended  by  Council  Implementing  Decision 
2017/1854/EU3 until 31 December 2020. 

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OJ 347, 11.12.2006, p.1. 
Council  Implementing  Decision  (EU)  2014/797  of  7  November  2014  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 330, 15.11.2014, p. 48). 
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 
Articles  26(1)  and  Article  168  and  168a  of  Directive  2006/112/EU  on  the  common  system  of  value 
added tax (OJ L 265, 14.10.2017, p. 17). 

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Given that the validity of Council Implementing Decision (EU) 2014/797 had expired before 
Estonia submitted, in  February 2021, the latest  request  to  further extend its temporal  scope, 
this  request  will  be  treated  as  an  original  request  to  apply  a  measure  derogating  from  the 
overall  principles  governing  the  right  to  deduct  input  VAT  in  relation  to  expenditure 
connected with passenger cars not wholly used for business purposes.  

Estonia has requested to be allowed to restrict the right of deduction to a set percentage and in 
turn to relieve the business from accounting for tax on the private use. This has the benefit of 
simplifying  the  system  for  all  concerned  and  prevents,  at  the  same  time,  tax  evasion  or 
avoidance because of incorrect record keeping. 

Estonia  informed  the  Commission  that  the  grounds  for  granting  the  measure  are  largely  the 
same as set out in the requests that led to the Council Implementing Decisions 2014/797/EU 
and 2017/1854/EU.  

Estonia  presented  data  suggesting  that  from  the  moment  of  the  implementation  of  the 
derogation  under  Council  Implementing  Decisions  2014/797/EU,  the  vast  majority  of 
company  cars  continued  to  be  used  for  private  purposes,  confirming  that  the  derogation  is 
justified. 

The measure should apply to all passenger cars with a maximum of eight seats in addition to 
the  driver’s  seat,  not  exceeding  3  500  kilograms,  and  which  are  not  used  exclusively  for 
business  purposes.  However,  passenger  cars  which  are  used  for  certain  specific  activities 
would be treated under the normal rules: cars purchased for resale, hire or lease, cars used for 
transportation of passengers (such as taxis), and cars used for driving lessons. 

The restriction to the right of deduction should apply to VAT paid on the purchase, leasing, 
intra-Community  acquisition,  and  importation  of  specified  passenger  cars  as  well  as 
expenditure related thereto. 

According  to  Estonia,  the  deduction  limit  should  be  set  at  50  %,  because  the  situation  has 
remained  unchanged  compared  to  when  the  special  measure  was  firstly  introduced  in  2014. 
Although the private use of company cars in Estonia is estimated to be at around 60 %, based 
on indirect evidence and assumptions available to the Estonian tax authorities, a 50 % input 
VAT deduction limit is considered the most appropriate, in order to exclude the possibility of 
overestimating the proportion of private use of passenger cars. 

Given the positive impact of the measure on the administrative burden of taxpayers and tax 
authorities alike, it is proposed to authorise the derogation measure. The authorisation should 
be valid for a limited period, i.e. until 31 December 2024, in order to allow for a review of the 
necessity  and  effectiveness  of  the  derogating  measure  and  the  apportionment  between 
business and non-business use it is based on. 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. 

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• 

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 (Hungary4, Latvia5, Croatia6, Poland7, Italy8 and Romania9). 

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 proposal 
falls  under  the  exclusive  competence  of  the  European  Union.  The  subsidiarity  principle 
therefore 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  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 

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10 

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)  2018/1921  of  4  December  2018  amending  Implementing 
Decision 2015/2429/EU 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. 
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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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  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 Estonia 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 by removing the need for 
taxable  persons  to  keep  records  on  the  private  use  of  specified  passenger  cars,  and,  at  the 
same  time,  to  prevent  VAT  evasion  through  incorrect  record  keeping.  It  has,  therefore,  a 
potential positive impact for both  businesses and tax administrations. The solution  has been 
identified  by  Estonia  as  a  suitable  measure  and  is  comparable  to  other  past  and  present 
derogations. 

4. 

BUDGETARY IMPLICATIONS 

The  derogating  measures  will  only  have  a  negligible  effect  on  the  overall  amount  of  tax 
revenue collected at the stage of final consumption and will have no adversely impact on the 
Union’s own resources accruing from VAT. 

5. 

OTHER ELEMENTS 

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

In  case  Estonia  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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2021/0322 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

authorising Estonia to apply a measure derogating from Article 26(1), point (a), 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) 

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 2014/797/EU2 authorised Estonia to  restrict to  50 % 
the  right  to  deduct  VAT  on  the  purchase,  leasing,  intra-Community  acquisition  and 
importation of certain passenger cars and to relieve the taxable person from accounting 
for  VAT  on  the  non-business  use  of  vehicles  covered  by  the  restriction  until  31 
December 2017. 

Council 
Implementing Decision 2014/797/EU to 31 December 2020. 

Implementing  Decision  2017/1854/EU3  extended 

the  validity  of 

By  letter  registered  with  the  Commission  on  12  February  2021,  Estonia  submitted  a 
request  to  the  Commission  to  be  authorised  to  apply  a  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  concerning  the  purchase,  leasing,  intra-
Community  acquisition  and  importation  of  certain  passenger  cars  used  for  non-
business purposes. 

(5) 

In  accordance  with  Article  395(2),  second  subparagraph,  of  Directive  2006/112/EU, 
the Commission informed the other Member States, by letter of 19 March 2021, of the 

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OJ L 347, 11.12.2006, p.1. 
Council Implementing Decision 2014/797/EU of 7 November 2014 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 330, 15.11.2014, p. 48). 
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 
Articles  26(1)  and  Article  168  and  168a  of  Directive  2006/112/EU  on  the  common  system  of  value 
added tax (OJ L 265, 14.10.2017, p. 17). 

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(6) 

(7) 

(8) 

request  made  by  Estonia.  By  letter  of  23  March  2021,  the  Commission  notified 
Estonia  that  it  had  all  the  information  it  considered  necessary  for  appraisal  of  the 
request. 

The  non-business  use  of  passenger  cars  is  often  very  difficult  to  identify  accurately 
and even where it is possible, the mechanism for doing so is often burdensome. Under 
the requested authorisation, the amount of VAT on expenditure eligible for deduction 
in respect of passenger cars which are not used entirely for business purposes should, 
with  some  exceptions,  be  set  at  a  flat  percentage  rate.  Based  on  currently  available 
information, the Estonian authorities believe that a rate of 50 % is justifiable. At the 
same time, in order to avoid double taxation, the requirement of accounting for VAT 
on the non-business use of passenger cars should be suspended where those cars have 
been  subject  to  a  limitation.  This  simplification  measure  removes  the  need  to  keep 
records  on  private  use  of  business  cars  and,  at  the  same  time,  prevents  tax  evasion 
through incorrect record keeping.  

The limitation of the right of deduction under the requested authorisation should apply 
to VAT paid on the purchase, leasing, intra-Community acquisition and importation of 
specific categories of passenger cars and on expenditure related thereto, including the 
purchase of fuel. 

The  requested  authorisation  should  only  apply  to  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, since any non-business use of passenger cars exceeding 
3  500  kilograms  or  having  more  than  eight  seats  in  addition  to  the  driver's  seat  is 
negligible  due  to  the  nature  of  those  passenger  cars  or  the  type  of  business  they  are 
used  for.  A  detailed  list  of  specific  passenger  cars  excluded  from  that  authorisation 
should also be provided, based on their particular use. 

(9) 

The authorisation should be limited in time until 31 December 2024, in order to allow 
for  a  review  of  the  necessity  and  effectiveness  of  the  derogating  measure  and  the 
apportionment rate between business and non-business use it is based on. 

(10)  Where  Estonia  considers  that  an  extension  of  the  authorisation  beyond  2024  is 
necessary,  it  should  submit,  by  31  March  2024,  to  the  Commission  a  request  for  an 
extension accompanied by a report which includes a review of the percentage applied. 

(11)  The derogation 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:  

Article 1 

By  way  of  derogation  from  Articles  168  and  168a  of  Directive  2006/112/EC,  Estonia  is 
authorised  to  limit  to  50  %  the  right  to  deduct  the  value  added  tax  on  expenditure  on 
passenger  cars  not  wholly  used  for  business  purposes  where  that  expenditure  covers  the 
purchase,  leasing,  intra-Community  acquisition  or  importation  of  passenger  cars  not  wholly 
used for business purposes, as well as on expenditure related to the maintenance and repair of 
such cars and to the purchase of fuel for them. 

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Article 2 

By way of derogation from Article 26(1), point (a), of Directive 2006/112/EC, Estonia 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. 

Article 3 

1. 

2. 

(a) 

(b) 

(c) 

This Decision shall only apply to 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. 

This Decision shall not apply to the following categories of passenger cars: 

cars purchased for resale, hire or lease; 

cars used for transportation of passengers for a fee, including taxi services; 

cars used for the provision of driving lessons.  

Article 4 

This  Decision  shall  expire  on  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 the Republic of Estonia. 

Done at Brussels, 

Article 5 

For the Council 
The President 

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