Articles 168 VAT Directive provides that a taxable person is entitled to deduct 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.
Romania is currently authorised on the basis of Council Implementing Decision 2012/232/EU 2 to restrict to 50 % the right to deduct VAT on the purchase, intra-Community acquisition, importation, hire or leasing of motorised road vehicles as well as expenditure related thereto. Some categories of vehicles were specifically excluded from this restriction, such as vehicles used exclusively for emergency, security or courier services, vehicles used by agents and taxis, vehicles used for instruction by driving schools, used for hire or leasing or used as commodities for trading purposes. At the same time, businesses are relieved from accounting from tax on the private use. Council Implementing Decision 2015/156/EU 3 authorised Romania to continue to apply until 31 December 2017 the special measure. The period of validity of this decision was extended by Council Implementing Decision (EU) 2017/2012 of 7 November 2017 4 until 31 December 2020.
Romania has requested to prolong the authorisation to limit the initial deduction to a set percentage and in turn to relieve the business from accounting for tax on the private use. Romania informed the Commission that the grounds for the prolongation of the measure are largely the same as described in the initial request. In accordance with Article 4(2) of Council Decision 2012/232/EU Romania has presented a report on the deduction limit applied by Romania. Romania submits that the measure fulfilled its role and that if the measure were not prolonged, the tax evasion recorded in this area before the introduction of the measure would most probably re-appear. According to the data submitted, the share of small enterprises in Romania is high: 99.7% of all the enterprises active in the industrial sector, the construction sector or the services sector in 2017 were small or medium-sized enterprises; and active enterprises with up to nine employees accounted for 89.4% of all economic and social operators active in those four sectors. Romania argues that, in practice, a car owned by such enterprises is often used both for business activities and for personal purposes.
It also appears from the information provided by Romania that the limitation of 50% still reflects the overall business and private use of vehicles by taxable persons in Romania and that this limit therefore should still be regarded as appropriate.
The derogation should be limited in time to 31 December 2023, so that it can be assessed whether the 50% restriction is still a correct reflection of the overall apportionment between business and private use. Any extension request should be accompanied by a report which includes a review of the percentage applied and should be sent to the Commission with that request by 31 March 2023.