Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/1994 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
Date: 2021-10-13
Institutions: Directorate-General for Taxation and Customs Union, European Commission
Subjects: Croatia, VAT, derogation from EU law, hire purchase, motor car, provision of services, purchase, tax relief

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   EUROPEAN COMMISSION  Brussels, 13.10.2021  COM(2021) 631 final 2021/0325 (NLE)  Proposal for a COUNCIL IMPLEMENTING DECISION amending Implementing Decision (EU) 2018/1994 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      
 
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  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 31 March 2021, Croatia requested an extension 
of the derogation from Article 26(1), point (a), and Article 168 of the VAT Directive in order 
to  continue  to  restrict  the  right  to  deduct  the  input  VAT  on  the  purchase  and  lease  of 
passenger cars, including the purchase of all goods and services supplied in relation thereto. 
Together with the request for extension, Croatia 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 letter dated 22 April 2021 of the request made by Croatia. By letter dated 
23 April 2021, the Commission notified Croatia 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 

Article 168 of the VAT Directive provides that a taxable person is entitled to deduct the VAT 
charged on purchases made for the purpose of taxed transactions. Article 168a(1) of the VAT 
Directive provides that the VAT on expenditure related to immovable property forming part 
of  the  business  assets  of  a  taxable  person  and  used  both  for  business  and  non-business 
purposes shall be deductible only to the proportion of the property’s use for purposes of the 
taxable person’s business. Pursuant to Article 168a(2) of the VAT Directive Member States 
may also apply this rule in relation to expenditure related to other goods forming part of the 
business  assets  as  they  specify.  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. 
Croatia is currently authorised on the basis of Council Implementing Decision 2018/1994/EU2 
to restrict to 50 % the right of deduction of VAT paid on the purchase and leasing of specified 
passenger cars, including the purchase of all goods and services supplied in relation thereto, 
when those 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 

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OJ L 347, 11.12.2006, p. 1. 
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. 35-36. 

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of  services.  Passenger  cars  covered  by  this  measure  are  motor  vehicles  intended  for  the 
transport  of  persons  with  a  maximum  of  eight  seats  in  addition  to  the  driver’s  seat.  If 
passenger cars are used for certain specific activities, they are excluded from the restriction to 
the right to deduct and are treated under the normal rules. This applies to vehicles used for the 
training  of  drivers,  vehicle  testing,  repair  services,  an  economic  activity  involving  the 
transport  of  passengers  and  goods,  the  transport  of  deceased  or  rent,  as  well  as  to  vehicles 
purchased for the purpose  of resale. Council  Implementing  Decision 2018/1994/EU is  valid 
until 31 December 2021. 

The  present  request  by  Croatia  to  prolong  further  the  special  measure  is  based  on  the  same 
grounds  as  those  presented  in  the  previous  request.  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(3) of Council Implementing Decision 2018/1994/EU. Croatia considers that the 
conditions for the application of the special measure continue to apply and that the currently 
applied 50 % input VAT deduction limit continues to be the most appropriate.  

Croatia  explained  that,  based  on  data  provided  by  both  taxable  persons  and  tax 
administrations,  passenger  cars  forming  part  of  business  assets  keep  being  used  for  private 
purposes at an average of 50 %. In this regard, Croatia submitted two surveys carried out in 
the  beginning  of  2021  on  the  use  of  passenger  cars  used  for  business  and  private  use, 
indicating  that  setting  the  percentage  of  the  right  to  deduction  of  input  tax  at  50  %  still 
appears realistic.   

Given  the  positive  impact  of  the  special  measure  on  the  administrative  burden  of  taxpayers 
and  tax  authorities  alike,  it  is  proposed  to  authorise  the  extension  of  the  current  derogation 
measure. The authorisation should be valid for another 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  rate  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. 

Since Croatia, under Article 168a(2) of the VAT Directive, opted to apply Article 168a(1) of 
the  VAT  Directive  to  other  economic  goods  forming  part  of  the  business  assets  than 
immovable  property,  a  reference  to  Article  168a  of  that  Directive  should,  for  reasons  of 
completeness,  be  included  in  the  title  and  Article  1  of  Council  Implementing  Decision 
2018/1994/EU. 

• 

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, Hungary4, Latvia5, 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 
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), valid until 31 December 2020. 
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)  2019/1594  of  24  September  2019  amending  Implementing 
Decision 2013/805/EU authorising the Republic of Poland to introduce measures derogating from point 

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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 proposal 
falls under the exclusive competence of the European Union. 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 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. 

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(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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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. 

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.  It  has,  therefore,  a 
potential positive impact for both businesses and the tax administration. The solution has been 
identified  by  Croatia  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  Croatia  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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2021/0325 (NLE) 

Proposal for a 

COUNCIL IMPLEMENTING DECISION 

amending Implementing Decision (EU) 2018/1994 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     

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  taxable  persons’  right  to 
deduct value added tax (VAT) charged on supplies of goods and services received by 
them  for  the  purposes  of  their  taxed  transactions.  Article  26(1),  point  (a),  of  that 
Directive contains a requirement to account for VAT when a business  asset is put to 
use  for  private  purposes  of  taxable  persons  or  their  staff  or,  more  generally,  for 
purposes other than those of their business. 
Council  Implementing  Decision  (EU)  2018/19942  authorised  Croatia,  until  31 
December  2021,  to  limit  to  50%  the  right  to  deduct  VAT  paid  on  the  purchase  and 
leasing of specified passenger  cars  with  a maximum  of eight  seats  in  addition  to  the 
driver’s  seat,  including  the  purchase  of  all  goods  and  services  supplied  in  relation 
thereto, when those cars are not wholly used for business purposes. The authorisation 
also  relieved  taxable  persons  from  having  to  treat  the  non-business  use  of  such 
passenger cars as a supply of services.  

By  letter  registered  with  the  Commission  on  31  March  2021,  Croatia  requested  an 
authorisation to continue to apply the special measure derogating from Article 26(1), 
point  (a),  and  Article  168  of  Directive  2006/112/EC  in  order  to  restrict  the  right  of 
deduction  in  relation  to  expenditure  on  certain  passenger  cars  not  wholly  used  for 
business purposes (‘the request’).  

Croatia  applies  Article  168a(1)  of  Directive  2006/112/EC  in  relation  to  VAT  on 
expenditure related to other economic goods forming part of the business assets under 
Article  168a(2)  of  that  Directive.  Thus,  Council  Implementing  Decision  (EU) 
2018/1994 should have included a reference to Article 168a of Directive 2006/112/EC.  

(5) 

In accordance with Article 395(2), second subparagraph, of Directive 2006/112/EC, by 
letter dated 22 April 2021, the Commission informed the other Member States of the 

1 
2 

OJ L 347, 11.12.2006, p. 1. 
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. 35-36. 

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

As  required  by  Article  6(3)  of  Implementing  Decision  (EU)  2018/1994,  Croatia 
submitted a report including the review of the percentage laid down for the limitation 
of the right of deduction. Based on currently available information, Croatia confirmed 
that the limit of 50 % is still justifiable and remains appropriate. 

Given  the  positive  impact  of  the  special  measure  on  the  administrative  burden  of 
taxpayers and tax authorities alike, Croatia should therefore be authorised to continue 
to apply the special measure. The extension of the special measure should be limited 
in time, until 31 December 2024, to allow for an evaluation of its effectiveness and of 
the appropriate percentage. 

In  the  event  that  Croatia  considers  that  a  further  extension  of  the  special  measure  is 
necessary, it should submit the request for an extension accompanied by a report that 
includes a review of the percentage applied to the Commission by 31 March 2024. 

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. 

(6) 

(7) 

(8) 

(9) 

(10) 

Implementing Decision (EU) 2018/1994 should, therefore be amended accordingly, 

HAS ADOPTED THIS DECISION:  

Implementing Decision (EU) 2018/1994 is amended as follows: 

(1) the title is replaced by the following: 

Article 1 

‘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 Articles 168 and 
168a of Directive 2006/112/EC on the common system of value added tax’; 

(2) Article 1 is replaced by the following: 

‘Article 1 

By  way  of  derogation  from  Articles  168  and  168a  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.’; 

(3) Article 6 is replaced by the following: 

‘Article 6 

The 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 that 
includes a review of the percentage set out in Article 1.’. 

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This Decision is addressed to the Republic of Croatia. 

Done at Brussels, 

Article 2 

For the Council 
The President 

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