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 Articles 168 and 168a of Directive 2006/112/EC on the common system of value added tax
Date: 2024-09-09
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

EN 

  EN 

   EUROPEAN COMMISSION  Brussels, 9.9.2024  COM(2024) 398 final 2024/0221 (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 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  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 3 April 2024, Croatia requested an extension of 
the  derogation  from  Article  26(1),  point  (a),  Article  168  and  Article  168a  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 14 May 2024 of the request made by Croatia. By letter dated 
15 May 2024, 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 by Council Implementing Decision 2018/19942 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 

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. 

EN 

1 

  EN 

 
from  having  to  treat  the  non-business  use  of  such  passenger  cars  as  a  supply  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.  This  authorisation  is  set  to  expire  on  31  December  2024  following  its  prolongation, 
approved by Council Implementing Decision (EU) 2021/1997 of 15 November 20213. 

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  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  2024  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 
2027,  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 2027. 

• 

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, Italy5, Latvia6, Hungary7, Poland8 and Romania9). 

3 
4 

5 

6 

7 

8 

OJ L 408, 17.11.2021, p. 1-2.  
Council Implementing Decision (EU) 2021/1998 of 15 November 2021 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 (OJ L 408, 17.11.2021, p. 3-5). 
Council Implementing Decision (EU) 2022/2411 of 6 December 2022 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 317, 9.12.2022, p. 120–121). 
Council  Implementing  Decision  (EU)  2021/1968  of  9  November  2021  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 401, 12.11.2021, p. 1-2). 
Council Implementing Decision (EU) 2021/1774 of 5 October 2021 amending Implementing Decision 
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 
(OJ L 360, 11.10.2021, p. 108–109). 
Council  Implementing  Decision  (EU)  2022/2385  of  6  December  2022  amending  Implementing 
Decision 2013/805/EU authorising the Republic of Poland to introduce measures derogating from point 

EN 

2 

  EN 

 
 
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 procedure and would prevent tax evasion inter 
alia through incorrect record keeping. 

• 

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 

No stakeholder consultation has been conducted. The present proposal is based on a request 

9 

10 

(a) of Article 26(1) and Article 168 of Directive 2006/112/EC on the common system of value added 
tax (OJ L 315, 7.12.2022, p. 87–88). 
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. 6-7). 
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) 

EN 

3 

  EN 

 
made by Croatia and concerns only this Member State. 

• 

Collection and use of expertise 

There was no need to recourse to 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 Croatian Chamber of Economy conducted at the beginning of 2024 a survey to determine 
if  the  percentage  of  50%  was  still  relevant.  A  questionnaire  was  sent  to  7,389  business 
entities,  and  585  replies  were  received.  Further,  an  independent  company,  Promocija  plus 
Ltd., carried out in 2024 a survey on the use of cars for business and private purposes on a 
sample  of  600  subjects,  who  use  an  official  car  in  their  household.  Based  on  the  analysis 
carried out on the results of both surveys, Croatia concludes that, in the case of mixed use of a 
car, the use for business purposes remains at the average of 50%. Therefore, the percentage of 
the right  to  deduction of input tax in  the  amount of 50%  remains  realistic and grounded on 
performed analyses. 

While the limitation of 50% on the right of deduction of input tax on purchase and lease of 
passenger  cars, including  the purchase of  all goods  and services supplied in  relation  thereto 
reduced  the  VAT  state  budget  revenue  in  the  average  annual  amount  of  HRK  410  million, 
approximately EUR 54.4 million, the increase in the price of cars have led to an increase in 
the VAT  collected from passenger cars  and its components.  Therefore, the measure has not 
led  to  a  significant  impact  on  the  state  budget,  while  reducing  the  administrative  burden 
derived from the measures necessary to control the correct application of the deduction of the 
input VAT for both taxable persons and tax administration. 

The solution has been identified by Croatia as a suitable measure and is comparable to other 
past and present derogations. 

• 

Fundamental rights 

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

4. 

BUDGETARY IMPLICATIONS 

The proposal will 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. 

5. 

OTHER ELEMENTS 

The proposal is limited in time and includes a sunset clause set at 31 December 2027. 

In  case  Croatia  would  consider  another  extension  of  the  special  measure  beyond  2027,  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 2027. 

EN 

4 

  EN 

2024/0221 (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 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  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 authorises Croatia 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  relieves  taxable  persons  from 
having to treat the non-business use of such passenger cars as a supply of services for 
consideration.  Implementing  Decision  (EU)  2018/1994  is  due  to  expire  on  31 
December 2024. 

By  letter  registered  with  the  Commission  on  3  April  2024,  Croatia  requested  an 
authorisation  to  continue  to  apply  the  derogation  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 relation to expenditure related to certain passenger cars not wholly used 
for business purposes (‘the special measure’). 

In  accordance  with  Article  395(2),  second  subparagraph,  of  Directive  2006/112/EC, 
the Commission, by letter dated 14 May 2024, transmitted the request made by Croatia 
to  the  other  Member  States.  By  letter  dated  15  May  2024,  the  Commission  notified 

1 
OJ L 347, 11.12.2006, p. 1, ELI: http://data.europa.eu/eli/dir/2006/112/oj. 
2 
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 
35,  ELI: 
tax 
on 
http://data.europa.eu/eli/dec_impl/2018/1994/oj).  

value-added 

17.12.2018, 

common 

(OJ  L 

system 

320, 

the 

of 

p. 

EN 

5 

  EN 

 
(5) 

(6) 

(7) 

(8) 

Croatia  that  it  had  all  the  information  it  considered  necessary  for  appraisal  of  the 
request. 

In  accordance  with    Article  6,  second  paragraph,  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 by simplifying VAT collection and preventing tax 
evasion through incorrect record keeping, Croatia should be authorised to continue to 
apply the special measure. The extension of the special measure should be limited in 
time, until 31 December 2027, to allow for an evaluation of its effectiveness and of the 
appropriate percentage. 

In  the  event  that  Croatia  considers  that  an  extension  of  the  special  measure  is 
necessary in addition to the one provided for under this Decision, 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 2027. 

The special measure will 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. 

(9) 

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

HAS ADOPTED THIS DECISION:  

Article 6 of Implementing Decision (EU) 2018/1994 is replaced by the following: 

Article 1 

‘Article 6 

This Decision shall apply from 1 January 2019 until 31 December 2027. 

Any  request  for  the  extension  of  the  authorisation  provided  for  in  this  Decision  shall  be 
submitted to  the Commission  by 31 March 2027 and  shall be  accompanied by  a report that 
includes a review of the percentage set out in Article 1.’.  

This Decision is addressed to the Republic of Croatia. 

Done at Brussels, 

Article 2 

For the Council 
The President 

EN 

6 

  EN