Explanatory Memorandum to COM(2025)104 - Authorisation of Slovakia to derogate from point (a) of Article 26(1) and Articles 168 and 168a of the VAT Directive - Main contents
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| dossier | COM(2025)104 - Authorisation of Slovakia to derogate from point (a) of Article 26(1) and Articles 168 and 168a of the VAT Directive. |
|---|---|
| source | COM(2025)104  |
| date | 13-03-2025 |
Pursuant to Article 395 i of Directive 2006/112/EC of 28 November 2006 on the common system of value added tax 1 ('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 5 November 2024, Slovakia requested an authorisation to derogate from Article 26 i, point (a), Article 168 and Article 168a of the VAT Directive in order to restrict the right to deduct the input VAT on the purchase, lease, intracommunity acquisition and importation of motor vehicles M1 category, motorcycles L1e category and motorcycles L3e category 2 , as well as for the supply of relevant services, spare parts, accessories and fuel when they are used simultaneously for business purposes and other purposes. With the request Slovakia provided an analysis justifying the percentage of deduction applicable, which is set at fifty per cent.
In accordance with Article 395(2) of the VAT Directive, the Commission informed the other Member States by letter dated 29 November 2024 of the request made by Slovakia. By letter dated 2 December 2024, the Commission notified Slovakia 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 i 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 and motorcycles, this system is difficult to apply, 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.
Slovakia has requested to be allowed to restrict the right of deduction for certain passenger cars and motorcycles which are not fully used for business purposes, and for the provision of certain goods and services related to them, to a set percentage and in turn to relieve the business from accounting for tax on the private use. The special measure would relieve taxable persons from having to treat the non-business use of such passenger cars and motorcycles as a supply of services. 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.
The advantages of the use of a flat rate were confirmed by an electronic questionnaire elaborated by the Slovakian Ministry of Finance. This questionnaire was distributed to businesses through business associations to obtain data on the use of vehicles that were part of the business assets for both private and business purposes. From the examined sample of respondents, 71 % of them preferred the use of a flat-rate percentage for the deduction of VAT on vehicles of mixed use, while 78 % of the respondents considered the current treatment as administrative burdensome.
Together with the data obtained from the survey, Slovakia has analysed data derived from control activities aimed at verifying the data on purchases of motor vehicles and the entitlement of input tax deduction on those vehicles, as well as data from on-spot visits and audits. From the different activities carried out the Slovakian authorities arrived at the conclusion that a fifty per cent percentage is an accurate estimate of the distribution of the use of the vehicles between private and business use.
Cars and motorcycles covered by this measure are motor vehicles from the M1 category, motorcycles from the L1e category and motorcycles from the L3e category not fully used for business purposes. The transactions covered are the purchase, intracommunity acquisition and importation of these vehicles, as well as their leasing. The limitation of the right of deduct will also apply to the abovementioned transactions when related to spare parts, accessories, services and fuelling intended for these vehicles. Nevertheless, certain types of motor vehicles and motorcycles used for certain type of activities where the non-business use is considered negligible are excluded from the scope of the derogation. This exclusion covers cars and motorcycles purchased for resale, hire or lease or used for transportation of passengers for consideration, including taxi services, the provision of driving lessons, testing purposes or as replacement of vehicles undergoing works.
Given the positive impact expected from the special measure on the administrative burden of taxpayers and tax authorities alike, it is proposed to authorise the derogating measure.
The authorisation should be valid for a limited period, until 30 June 2028, 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 30 September 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 (Estonia 3 , Italy 4 , Latvia 5 , Hungary 6 , Poland 7 , Romania 8 and Croatia 9 ).
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 or, in the case of the Member States which acceded to the Community after that date, on the date of their accession. There are therefore several “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 deduct 10 , 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 aims 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 OF EX-POST EVALUATIONS, STAKEHOLDER CONSULTATIONS AND IMPACT ASSESSMENTS
• Stakeholder consultations
No stakeholder consultation has been conducted. The present proposal is based on a request made by Slovakia 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 Slovakian tax authorities conducted an analysis on the data derived from control activities from January 2023 to May 2024. From this analysis it concluded that taxpayers applied the flat rate foreseen in the Slovakian Act on Income Tax to the VAT paid on the acquisition of passenger cars and motorcycles and related expenses, instead of determining the real use for private and business purposes of the vehicles. Even though the provision was aimed at its use only in relation to income tax, taxpayers considered that the application of this flat rate could avoid litigation with tax authorities.
Further, the tax authorities conducted audits on 255 taxpayers from 2019 to 2024. The audits were merely focused on the usage of motor vehicles and the verification was carried out on 277 motor vehicles from which 240 were passenger motor vehicles. According to the Slovak authorities, these audits proved that in many cases taxpayers were practising incorrect deductions on the input VAT related to those vehicles. The Slovak authorities also arrived at the conclusion that the use for business purposes was slightly over fifty per cent of the total use.
Finally, the Slovak authorities obtained additional data from a questionnaire that was distributed to businesses through business associations.
From the analysis of the data obtained, the Slovak authorities arrived at the conclusion that a fifty per cent flat rate constitutes a realistic proxy of the distribution of the use of the car for private and business purposes.
• 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 30 June 2028.
In case Slovakia would consider an extension of the special measure, a report including a review of the percentage limit should be submitted to the Commission together with the extension request, no later than 30 September 2027.