Tax accounting related to vehicles

Creation of a fringe benefit on an employer’s vehicles (except for passenger cars)

Under subsection 48 (4) of the Income Tax Act, a fringe benefit is considered to include any kind of goods, services, remuneration in kind or monetarily appraisable benefits provided for employees in connection with working for an employer. Among other things, making a vehicle available for use for free or at preferential price is also a fringe benefit.

The purpose of the taxation of a fringe benefit is to tax equally benefits provided for an employee both monetarily and non-monetarily. It is important to note that it is the employee’s financial income, not the employer’s cost, that is taxed as a fringe benefit. Accordingly, it may sometimes happen that an employer has not actually incurred a (direct) cost, yet a fringe benefit has been provided and tax liability has been incurred.

An employer’s vehicle is considered to be a vehicle in the employer’s possession – be it owned by the employer, purchased under a leasing contract, rented, used (for free) under a usufruct contract or the like. Also important is the fact that when a vehicle is placed the disposal of an employee, it is owned by or in the possession of the employer.

Since the Income Tax Act does not address separately what is treated as a vehicle, the conceptualisation of the definition of a vehicle is based on legislation where the definition is set out. Under the Traffic Act, a vehicle is a means of transport which is intended to be driven on a road or which is driven on a road, and which is power-driven or propelled in some other manner. Thus, the specific type/category of a vehicle is not relevant to the creation of a fringe benefit. Whether it is a passenger car, lorry, bus, ATV, motorcycle, tractor etc. – if the employer permits a vehicle owned by it or in its possession to be used by its employee for free or at a preferential price for the employee’s private trips, a fringe benefit and also tax liability arise.

Furthermore, making an employer’s assets that are not a vehicle for the purposes of the Traffic Act (e.g. boats, launches etc.) available for an employee’s personal use for free or at a preferential price may create a fringe benefit. In the event of the use of these assets, the fringe benefit is calculated the same way as in the case of the use of vehicles.

Where a vehicle (except for a passenger car) owned by or in the possession of an employer is made available for use for free or at a preferential price for activities not connected to work, official or service duties or the employer’s business, the fringe benefit price is considered to be the market price of the rental of the assets or the difference between the market price and the preferential price of rental. The market price is the price used by independent parties in reciprocal transactions on similar conditions, for example, in the case of vehicles, the price and the conditions on which vehicles are rented to their customers by companies engaged in the rental of vehicles. The price of the entire fringe benefit is taxed.

The regulation of the Minister of Finance does not specify how an employer should document making or not making vehicles owned by it available for its employees for personal trips. This is subject to general documentation requirements, that is, an employer has to be able to prove with sufficient documents whether and how trips completed with the vehicle are/were linked to its business or not. If there are enough documents to make sure that all the trips completed with the vehicle were related to business and no personal trips of employees were undertaken (for free or at a preferential price), no tax liability arises.

An employer owns a category N1 van used by its employee to also for personal trips. Since, however, the employer does not charge the employee for these trips, the employee has received a fringe benefit – an opportunity to use a car for free. For the calculation of the fringe benefit price and tax liability, the employer selected the market price of renting out the van. For example, if the rental conditions and price of such a van in the case of long-term rental at vehicle rental companies is 32 euros per day regardless of actual mileage, the employer can calculate the fringe benefit price based on this. If the employee used the van for a whole month, that is, 30 days, the fringe benefit prices works out to be 32 × 30 = 960 euros. Income tax liability works out to be 960 × 20/80 = 240 euros, and social tax liability comes to 960 + 240 × 33% = 396 euros. Hence, in the event of such a van being made available for an employee’s use for a month, the employer has to allow for an income tax and social tax liability of 636 euros.

Of course, the rental conditions and prices of rental companies are not always identical, and the market price has to be ascertained in particular on the basis of those conditions that are similar to the employer’s own.

Procedure for the taxation of an employer’s passenger car fringe benefit

From 1 January 2018, a fringe benefit applies to the provision of an employer’s passenger car for private trips. This means that the use of an employer’s passenger car for private trips is not irrelevant any more but rather making the passenger car available for use. Furthermore, reimbursement of private trips during the use of an employer’s passenger car is no longer relevant, since it does not alter the taxation of a fringe benefit.

In the case of an employers passenger cars (category M1 and M1G vehicles), the legislator has set special rules for the deduction of tax liability. The reason is the fact that the provision of an employer’s passenger car for an employee’s use is very common and that the calculation of tax liability under the general rules for making assets available for use would be too burdensome for the taxpayer.

From 1 January 2018, a new passenger car has a fringe benefit price of 1.96 euros per kW per month and a passenger car over 5 five years old 1.47 euros per kW per month. The engine power (kW) of a passenger car may be looked up in the Traffic Register of the Road Administration or the registration certificate (technical passport) of the passenger car.

Furthermore, the fringe benefit price may be calculated on kilowatt basis in the case of a van (category N1 vehicle) made by an employer available for private trips.

From 1 January 2018, private trips can be no longer reimbursed based on a calculation. As a result, keeping a travel log is not necessary either. However, if an employer wants to prove the use of a passenger car in business and for business trips only, a travel log may be kept (e.g. an electronic GPS travel log or the like). If it has been proven that the employer makes the passenger car available for business trips only, no fringe benefit is created.

Since the taxation of a fringe benefit does not depend on the use of a passenger car for private trips any more, and private trips can no longer be reimbursed based on records, if an employer rents a passenger car to its employee at a preferential or market price, tax liability for the fringe benefit still arises on the basis of a kilowatt-based calculation.

If the employer’s passenger car cannot be used for private trips, the employer has to notify the Road Administration thereof. In this case, fringe benefit tax also does not have to be paid.

Where a company rents a passenger car to another company, a notation has to be entered into the Traffic Register of the Road Administration. The lessor cannot assure that the lessee completes only business trips with the car. If a lessee enables its employees to use a passenger car also for private trips, the lessee has to declare and pay taxes on a passenger car fringe benefit regardless of the notation in the Traffic Register of the Road Administration.

The Road Administration has to be notified about the provision of category M1 vehicles, i.e. passenger cars, solely for business trips. The Road Administration does not have to be notified about the use of a category N1 vehicle (van).

Calculation and declaration of fringe benefit tax liability

From 1 January 2018, the fringe benefit price became lower for cars with lower engine power (up to 130 kW) and higher for cars with higher engine power (over 130 kW). In the case of a new car, fringe benefit tax liability works out to be 1.30 euros per kW per month (income tax and social tax on 1.96 euros, income tax liability of 1.96 × 20/80 = 0.49 euros and a social tax liability of (1.96 + 0.49) × 33% = 0.81 euros, thus a total tax liability of 0.49 + 0.81 = 1.30 euros), and in the case of a car over 5 years old, it works out to be 0.97 euros per kW per month (income tax and social tax on 1.47 euros).

The cost of a fringe benefit is calculated based on the power of a passenger car (1.96 euros per kW, or, if a passenger car is older than 5 years, 1.47 euros per kW). Accordingly, in the case of a new 190 kW power passenger car the fringe benefit price is 1.96 × 190 = 372.40 euros, and the tax liability calculated on it is 246.72 euros (income tax liability 372.40 × 20/80 = 93.10 euros and social tax (372.40 + 93.10) × 33% = 153.62 euros, thus a total tax liability of 93.10 + 153.62 = 246.72 euros). In the case of a new passenger car with 90 kW power, the fringe benefit price is 1.96 × 90 = 176.40 euros, and the tax liability calculated on it is 116.87 euros (income tax and social tax).

There is no change in the declaration of a fringe benefit, and an employer’s passenger car fringe benefit is declared in Annex 4 to the TSD tax return form on the 10th day of each following month. Usually, fringe benefit tax liability is paid based on TSD.

Value-added tax accounting related to passenger cars

From 1 December 2014, a new procedure applies to a passenger car and to any goods or services bought for it. Under the new procedure, instead of the taxation of passenger cars for self-consumption, the deduction of value-added tax paid on the purchase (including rental or leasing) of a passenger car or of goods or services for it is being limited. The general limit on input value-added tax deduction is 50%. Thus, when a passenger car used in business is purchased or used under a contract for use and goods or services are received for this passenger car, generally 50% input value-added tax is deducted from the value-added tax calculated. Effectively, the proportion of the use of a passenger car in business is considered 50%.

The limit on input value-added tax deduction applies to a category M1 (including M1G) vehicle whose gross vehicle weight does not exceed 3500 kilograms and which does not have more than eight seats in addition to the driver’s seat.

If a taxable person also has a tax-exempt supply or activity not considered business, these facts also have to be considered when input value-added tax is deducted.

Costs related to a passenger car are, for example, fuel, spare parts, maintenance, repairs, parking fees or costs (ferry tickets) incurred for the transport of a passenger car. The costs of the placement of advertising on a vehicle are not treated as the costs of a passenger car. These costs are not connected to the use of the vehicle but rather to advertising. Furthermore, the purchase or rental of a trailer is not treated as the cost of a passenger car.

If a passenger car bought for a company is used for making private trips in addition to business trips, a procedure applies whereby if a passenger car used in business is bought or used under a contract for use or if goods or services are received for it, 50% (or less if, for example, a portion of the company’s supply is tax-exempt) of input value-added tax is deducted from value-added tax.

Thus, regardless of the extent to which a vehicle used in business is being used in private consumption, input value-added tax may be deducted to the extent of 50%.

The costs of transport of employees between their places of residence and places of work are not treated as the use of a passenger car for private purposes if by public transport the journey cannot be completed in a reasonable time or at reasonable cost or if a disabled employee is unable to use public transport or if the use public transport causes a significant decline in their mobility or work ability.

Examples of the deduction of input value-added tax:

Example:

A passenger car is used in both business and private consumption. This passenger car is being used 60% for the purposes of taxable supply and 40% for the purposes of tax-exempt supply. Fuel was bought for 50 euros + value-added tax of 10 euros. There may be deducted 3 euros in input value-added tax (10 × 0.5 × 0.6).

Example:

A passenger car is used exclusively for business. This passenger car is being used 60% for the purposes of taxable supply and 40% for the purposes of tax-exempt supply. Fuel was bought for 50 euros + value-added tax of 10 euros. There may be deducted 6 euros in input value-added tax (10 × 0.6).

Subsection 30 (4) of the Value-Added Tax Act sets out the exceptions where there is no limit on the deduction of value-added tax paid on a passenger car or on the receipt of any goods or services for it.

The exception is applied if:

  • A passenger car is purchased for sale or for being rented out.
    It is important for passenger cars purchased for being sold or rented out not to be taken into own use.
    Where a passenger car acquired for sale is taken into use for some other purpose, any input value-added tax deducted at the time of its purchase should be adjusted. Adjustment has to be done during the taxable period when the taxable person takes the passenger car purchased for sale into use for their own purposes. If a taxable person engages in making vehicles available for use, and a passenger car purchased for sale is, for example, rented out, the two-year period begins to be counted from when the passenger car is rented out.
  • A passenger car is used mainly for passenger transport or driver training for a fee.
    A taxable person is entitled to deduct input value-added tax on a vehicle used for business or on goods or services purchased for it in full also if the passenger car is used mainly for the for-fee carriage of passengers provided that the taxable person has a Community licence or a certified true copy of the Community licence. For a taxi service, a taxi licence and a licence card.
    Private consumption is taxed as use for self-consumption according to subsection 2 (71) of the Value-Added Tax Act. Under subsection 12 (71) of the Value-Added Tax Act, in the case of the use of these passenger cars the taxable value of self-consumption is the fringe benefit price calculated based on the Income tax Act divided by 1.2.

Hence, the provision of one’s employee with a passenger car used mainly for the provision of a for-fee passenger transport service or with a driver training car is taxed. Unlike other passenger cars, in the case of these vehicles input value-added tax may be deducted 100% also when a car is being used in private consumption. It is important for the vehicle to meet the conditions in clauses 30 (4) 3) or 4) of the Value-Added Tax Act.

The taxable value of self-consumption created by the use for private trips of a passenger car used mainly for the carriage of passengers or driver training or of a category N1 lorry (van) with a total effective vehicle mass of up to 3500 kilograms, inclusive of value-added tax, is the fringe benefit price calculated under the Income Tax Act. Under the Value-Added Tax Act, self-consumption cannot actually be created by the use of other passenger cars for private trips.

  • A passenger car is used exclusively for business.
    The exception is only applied if a passenger car is directly needed for business, and this passenger car is used for business exclusively.

A taxable person that applies the above exceptions and has deducted input value-added tax on the passenger car and related costs in full has to ensure that the use of the relevant passenger car for trips not related to business is prevented; it may continue to keep records as to the use of the passenger car. The manner in which records are kept is decided by the business operator itself – the objective is to ensure the use of the business operator’s passenger car solely for the purposes of business. For example, among other things a business operator may keep detailed records, that is, a travel log, or use a GPS service provided by a third party. Generally, a passenger car used exclusively in business should be parked in the location of the company outside business hours. Hence, the company decides how the passenger care is going to be used and then how this use is going to be assured and how the use of the passenger car may be checked by both its management and the tax authority.

If a passenger car used for business is in private consumption, the use of such a passenger car is not considered use for business exclusively, regardless of whether the employee indemnifies the costs related to the use of the passenger car or not. This scheme applies also to a company whose industry is making cars available for use and which provide their employees with cars for their use for a fee. In order to avoid double taxation, the private consumption of a passenger car is not taxed as self-consumption, and the provision of a passenger car, for a fee, for the use of a taxable person’s employee, a public servant or a member of a management or control body is not considered supply. The use of a company car for personal trips is taxed by fringe benefit based on the power of the vehicle.

Declaration of passenger cars on value-added tax returns

Subsection 30 (6) of the Value-Added Tax Act provides for the obligation of a taxable person to notify the tax authority about the use of the passenger cars of the company on the value-added tax return form (cells 5.3 and 5.4 on the KMD form of the value-added tax return).

In cell 5.3, there is indicated the number of passenger cars meeting the conditions set out in clauses 30 (4) 3) to 5) of the Value-Added Tax Act, that is, the number of passenger cars used exclusively for business or mainly for the for-fee carriage of passengers or driver training. Any value-added tax deducted at the time of the purchase of such a passenger car or when goods or services are received for such a passenger car should be also specified separately. Generally, there is entitlement to deduct input value-added tax 100%. If a taxable person also has tax-exempt supply in addition to taxable supply, calculation of input value-added tax has to take into account the proportion of the taxable supply in the entire supply.

The number of passenger cars used both within and outside business is indicated in cell 5.4. This means that there are indicated the number of vehicles not meeting the conditions set out in subsection 30 (4) of the Value-Added Tax Act and the input value-added tax amount calculated on costs related to such a passenger car. Generally, there is entitlement to deduct 50% of input value-added tax in connection with passenger cars used both within and outside business. Exceptionally, the deductible portion may be also less than 50%. This in the event that business accounts for a share less than 50% of the overall activities of a party (e.g. non-profit associations). If a taxable person also has tax-exempt supply in addition to taxable supply, the portion of deductible input value-added tax is reduced according to the proportions of taxable and tax-exempt supply.

In the relevant cell, there should be declared also passenger cars not used in that taxable period, for example when a passenger car was being repaired. A passenger car has to be declared in the cell that corresponds to the purpose of the use of the passenger car. Where a passenger car is effectively used in both business and private consumption, the information related to this passenger car is indicated in cell 5.4.

In cells 5.3 and 5.4, passenger cars are not declared if they have been purchased for sale or for being made available for use under contracts for use unless the passenger cars are taken into use.

Recalculation of input value-added tax deducted in full at the time of the purchase of a passenger car

If, at the time of its purchase, a passenger car was considered as being used only in business, and input value-added tax was deducted on its purchase price in full, yet during two years since its purchase, or since a passenger car acquired for sale has been taken into use in own business, it begins to be used also for personal trips, then:

if a passenger car is acquired in 2018 or later, the input value-added tax deducted at the time of the purchase of the passenger car has to be reduced on the value-added tax return for the month of the purchase;

if a passenger car has been acquired before 2018, the input value-added tax deducted at the time of the purchase of the passenger car has to be reduced on the value-added tax return for January 2018.

When input value-added tax deducted at the time of the purchase is adjusted, such a passenger car is considered to be used in business in part during the entire two years of its use regardless of the actual proportion of its use in business in individual months during the first two years.

If the intended use of a passenger car used solely in business changes, and the passenger car begins to be used also for a purpose other than business, this passenger car is subject to a 50% limit on the deduction of input value-added tax on such a passenger car. The limit has to be adhered to for at least one year (12 months) from the beginning of the taxable period of the modification of the intended use of a passenger car regardless of whether the vehicle been used during all these months in part in private consumption or during some months also exclusively for business.

For example, if a party has initially provided notification that it is using a vehicle for business only, and, for example, in June 2017 it takes this passenger car into use also for private purposes, it can deduct input value-added tax on costs related to the passenger car to the extent of 50% until May 2018 (inclusive) irrespective of whether it is using the passenger car for business only or not. The annual limit on the deduction of input value-added tax also applies regardless of what notation is made in the vehicle database in the Traffic Register.

Input value-added tax on running costs is not reduced retroactively, and the so-called two-year rule is not applied to running costs.

Example:

A passenger car is acquired in December 2017 without value-added tax at the price of 20 000 euros, and 100% of input value-added tax (4000 euros) is deducted at the time of the purchase. In July 2018, also private trips begin to be made with the passenger car – thus, the requirement to use the passenger car in business exclusively for at least two years has not been met.

Since the amendment to the Value-Added Tax Act entered into force on 1 January 2018, input value-added tax is recalculated on the January 2018 value-added tax return, by reducing the deductible input value-added tax declared in cells 5, 5.2 (if stated as fixed assets) and 5.3 by 2000 euros (50% of 4000 is 2000).

Since input value-added tax on running costs is not recalculated retroactively, the passenger car and the input value-added tax on the costs related to it, including input value-added tax deducted at the time of its purchase (regardless of any adjustment) remain in cell 5.3. of the value-added tax return until June 2018.

Example:

A passenger car is acquired in December 2018 without value-added tax at the price of 20 000 euros, and 100% of input value-added tax (4000 euros) is deducted at the time of the purchase. In June 2019, also private trips begin to be made with the passenger car – thus, the requirement to use the passenger car in business exclusively for at least two years has not been met.

Input value-added tax has to be recalculated on the December 2018 value-added tax return, by reducing the deductible input value-added tax declared in cells 5, 5.2 (if stated as fixed assets) and 5.3 by 2000 euros (50% of 4000 is 2000).

Since input value-added tax on running costs is not recalculated retroactively, the passenger car and the input value-added tax on the costs related to it, including input value-added tax deducted at the time of its purchase (regardless of any adjustment) remain in cell 5.3. of the value-added tax return until May 2019.

If the new so-called two-year rule is applied to a passenger car whose use for private trips for self-consumption has been taxed (a car mainly used for the carriage of passengers or driver training), the value-added tax amount subject to repayment is reduced by the amount of the value-added tax already paid on the self-consumption of the passenger car. This means that within two years from the purchase of a passenger car either its use for passenger transport or driver training ends altogether or it is no longer used mainly for passenger transport or driver training (and is used also for trips not related to business among other things).

Restriction on the deduction of input value-added tax on running costs related to a passenger car

If a passenger car is going to be used for private trips, from 01.01.2018, for one year from the month when it is taken into use for private trips, input value-added tax may be deducted on current costs related to the passenger car at not more than 50% regardless of whether private trips are made with the passenger car in the subsequent months of the one-year period or not; tax-exempt supply and non-business activities (for example, in the case of a non-profit association or a self-employed person) may reduce the percentage of deduction even further.

This so-called one-year rule applies regardless of the timing of the purchase of a passenger car – also in the case of passenger cars for which the period for the adjustment of input value-added tax deducted at the time of purchase has already ended. If the adjustment period has not ended yet, the adjustment at the end of a given calendar year of any input value-added tax deducted at the time of purchase has to allow for the fact that for at least one year from the month when it is taken into use for private trips this passenger car has to be considered as being used in part in business. From 01.01.2018, a sentence has been inserted into subsection 32 (4) of the Value-Added Tax Act to clarify that the proportion of the use in business of a passenger car used in business is calculated according to the provisions in subsection 29 (4) and section 30.

Running costs also include operational leasing payments on a passenger car, and in the case of a passenger car under operational leasing the so-called two-year rule explained above is not applied.

Example:

A passenger car is purchased in December 2018. A vehicle is used at first 100% in business (for taxable supply only), but private trips are also completed from July to September 2019.

Because private trips began in July 2019, now the new so-called one-year rule applies – from July 2019 to June 2020, input value-added tax on the running costs related to the passenger car may be deducted 50% regardless of the fact that from October 2019 to June 2020 no private trips are actually made with the car.

In July and August 2020, also only trips related to business are completed – since over a year already has now passed since being taken into use for private trips, in these months input value-added tax may be deducted on running costs 100%. From September 2020, private trips begin to be made again, and from that month the extent of the deduction of input value-added tax on running costs related to the passenger car is once more 50% until at least August 2021.

Adjustment of input value-added tax in the event of removal from the register of persons liable to value-added tax

If a business operator is removed from the register of persons liable to value-added tax and it has fixed assets not yet sold for which the input value-added tax adjustment period has not ended – on the value-added tax return for the month of removal from the register, it has to carry out the last adjustment of input value-added tax for the fixed assets, taking into account the entire period remaining until the end of the adjustment period. An adjustment is made based on the actual proportion of the use of the fixed assets for taxable supply from the beginning of the calendar year until removal from the register with respect to the year of removal from the register, and only the period from the month of removal from the register until the end of the adjustment period is considered a period during which the fixed assets are not used for taxable supply.

Recalculation of input value-added tax deducted at the time of the purchase of fixed assets

Subsection 32 (4) of the Value-Added Tax Act sets out the procedure for the recalculation of input value-added tax deducted at the time of the purchase of fixed assets if the proportion of the use of fixed assets for taxable supply changes during the course of five calendar years. Recalculation is done at the end of every calendar year at 1/5, allowing for the use of the fixed assets for business and for the ratio of taxable supply to overall supply. The procedure for the recalculation of fixed assets also applies to passenger cars. The proportion is calculated based on a proportion of 50% of the use of a passenger car in business.

The proportion of use in business is not 50% if:

taxable person’s business in all their activities is less than 50% (e.g. agencies, non-profit associations, subsection 29 (4) of the Value-Added Tax Act);

Input value-added tax should be adjusted in the case of both a passenger car and any goods or services acquired for it that increase the purchase cost of the fixed assets (generally, purchases of goods or services for a passenger car do not increase the acquisition cost of a passenger car). The first calendar year is considered to be the period from when the passenger car is classed as fixed assets until the end of the calendar year.

If a passenger car is sold before the lapse of five calendar years, input value-added tax is adjusted in the month of the sale of the passenger car allowing for the fact that the passenger car is used in the year of its sale and in the subsequent years only for taxable supply.

If a taxable person (e.g. non-profit association, agency), in deducting input value-added tax, uses the proportion under subsection 29 (4) of the Value-Added Tax Act, that is, the proportion of business with respect to all its activities, input value-added tax on a passenger car or any goods or services received for it are deducted to the extent of the relevant proportion but not more than 50%. For example, if the business of a non-profit association is 30% in all its activities, input value-added tax may be deducted 30% when a passenger car or goods or services for it are bought. If, however, the proportion of business were 70%, input value-added tax could be deducted 50% (see also comments on subsection 29 (4) of the Value-Added Tax Act).

the taxable person applies the exceptions specified in subsection 30 (4) of the Value-Added Tax Act.

Subsection 30 (7) of the Value-Added Tax Act only pertains to a situation where at the time of the purchase of a passenger car input value-added tax has been deducted based on the exception specified in clauses 30 (4) 2) to 5) of the Value-Added Tax Act, yet during two years (24 months) the use of the vehicle no longer corresponds to the provisions in subsection 30 (4) of the Value-Added Tax Act (i.e. subsection (7) is not adhered to in instances where at the time of the purchase of a passenger car input value-added tax has been deducted 50% in accordance with subsection (3)). This subsection (i.e. 2-year rule) pertains to the value-added tax paid at the time of the purchase of a passenger car, rather than the running costs of a passenger car.

For example, the intended use of a passenger car used for a taxi service over two years changes, and this passenger car is not used any more according to the conditions of a single clause of the exception. if within 2 years from its purchase a vehicle begins to be used for a purpose other than what is specified in the exceptions, any input value-added tax deducted at the time of the purchase of the passenger car has to be recalculated. Recalculation has to be done during the taxable period when input value-added tax has been deducted, and 50% of input value-added tax has to be paid back into state revenue. Since correction is done in the taxable period during which input value-added tax has been deducted previously, this results also in the obligation to pay interest if the taxable person had no prepayment with respect to this amount.

Since in the case of passenger cars used mainly for the carriage of passengers or driver training there is an entitlement to deduct input value-added tax 100%, whereas the use of such a passenger car for private purposes has to be taxed as self-consumption, in order to avoid double taxation any tax liability arising under subsection (7) is reduced accordingly by the value-added tax amount calculated on the use of such a passenger car for self-consumption.

If a passenger car purchased for sale is taken into use in one’s own business but not for business exclusively, input value-added tax is recalculated in the taxable period when the passenger car has been taken into use. If a passenger car purchased for sale is taken into use for the purposes specified in clauses 2 to 5 in subsection 4, the said two-year period is counted from when it is taken into use for the purposes specified in the above clauses.

Example:

A passenger car was purchased in January 2018, and input value-added tax was deducted 100% at 4000 euros, since the vehicle is used on the conditions specified in the exception. From October 2018, the use of this vehicle no longer meets the conditions specified in subsection 30 (4) Value-Added Tax Act. In terms of input value-added tax, a correction of 50%, that is, of 2000 euros, has to be made on the January 2018 value-added tax return.

Examples of the recalculation of input value-added tax at the time of the purchase of a passenger car

At the time of the purchase of a passenger car, input value-added tax has been deducted 50%.

Example:

A passenger car was purchased in March 2017. For a passenger car, 20 000 euros + 4000 euros in value-added tax was paid. There was deducted 2000 euros in input value-added tax (i.e. 50% 4000). A vehicle is used in both business and private consumption up to 1 January 2022. Therefore, over the course of five years the intended use did not change, and accordingly input value-added tax is not recalculated.

Example:

A passenger car is purchased in December 2018 at the price of 20 000 euros + 4000 euros in value-added tax. At the time of the purchase, 50% of input value-added tax (2000 euros) is deducted. A car is sold in February 2021.

For the first three calendar years (2018, 2019, 2020) of the adjustment period, there is entitlement to deduct input value-added tax on a passenger car 50%, or 3 × 400 = 1200 euros.

For 2021 and 2022, there is entitlement to deduct input value-added tax 100%, or 2 × 800 = 1600 euros.

Accordingly, adjustment results in a total deductible portion of input value-added tax of 2800 euros.

Given that 2000 euros in input value-added tax was deducted at the time of the purchase of the passenger car, an additional 800 euros (2800 – 2000) is deducted in February 2021 as a result of an adjustment, stated in cell 11 on the February 2021 return. The same result is obtained also by considering that for 2 years it was used, as it were, for business only and that for every year 50%, 400 euros, was not deducted; thus, additionally 2 × 400, or 800 euros, may be deducted.

Example:

A passenger car was purchased in March 2018. For a passenger car, 20 000 euros + 4000 euros in value-added tax was paid, and 50% of input value-added tax is deducted at the time of the purchase (2000 euros). A vehicle begins to be used exclusively for business from 1 January 2019 to 3 March 2020, when the vehicle is sold. Input value-added tax is recalculated as follows:

In the first year, value-added tax is not recalculated. The first recalculation is done in December 2019.

Recalculation is based on the fact that in 2019 the vehicle was used exclusively for taxable supply (corresponds to subsection 30 (4) of the Value-Added Tax Act); therefore, 800 euros (4000/5) may be deducted for 2019. At the time of the purchase of a passenger car, 400 euros (2000/5) has been deducted for one year. Hence, the adjustment in December 2019 results in an additional deduction of 400 euros, declared in cell 11 on the December value-added tax return.

Another recalculation is done in March 2020.

Recalculation is done based on the fact that in the year of the sale of the fixed assets and in the subsequent years (allowing for a five-year adjustment period) the fixed assets are used for taxable supply only. Hence, 2400 euros (3 × 800) may be deducted for three years, and 1200 euros (3 × 400) has been deducted for three years at the time of the purchase of the passenger car. Thus, 1200 euros (2400 – 1200) in input value-added tax is additionally deducted, declared in cell 11 on the March value-added tax return.

Example:

A passenger car is acquired in January 2018 at the price of 20 000 euros + 4000 euros in value-added tax, and 50% of input value-added tax (2000 euros) is deducted at the time of the purchase. A vehicle is used in both business and private consumption. A car begins to be used for tax-exempt supply in February 2023.

The period for the recalculation of fixed assets ended in 2022. Input value-added tax is not recalculated.

At the time of the purchase of a passenger car, input value-added tax has been deducted 100% under subsection 30 (4) of the Value-Added Tax Act, and the passenger car is used for its intended purpose for two years.

Example:

A passenger car is acquired in January 2018 at the price of 20 000 euros + 4000 euros in value-added tax, and 100% of input value-added tax (4000 euros) is deducted at the time of the purchase. A car is used 100% in business until 31 December 2020, during the period from January 2021 to December 2022 the passenger car is also used for private purposes.

Since the car was used exclusively for business for the first two years, input value-added tax is not recalculated under subsection 30 (7) of the Value-Added Tax Act. Recalculation is done as per subsection 32 (4) of the Value-Added Tax Act.

For the first three calendar years (2018 to 2020) of the adjustment period, there is entitlement to deduct input value-added tax on a passenger car 100%.

In 2021, a passenger car was used both in business and for private purposes, and as a result a recalculation is done in December 2021. During this period, 50% of 800 (4000/5), i.e. 400 euros, may be deducted, whereas 800 euros (4000/5) has been deducted for that year. Thus, additionally payable value-added tax should be calculated at 400 euros (800 – 400), stated in cell 10 on the 2021 December value-added tax return.

The same kind of calculation is done also for the fifth calendar year, and the result of 400 euros is stated on the value-added tax return for December 2022.

Example:

A passenger car is acquired in January 2018 at the price of 20 000 euros + 4000 euros in value-added tax, and 100% of input value-added tax (4000 euros) is deducted at the time of the purchase. A car is used 100% in business until 31 December 2020, during the period from January 2021 to September 2021 the passenger car is also used for private purposes. From October 2021, a passenger car is used only for business, until March 2022, when the vehicle is sold.

Since the car was used exclusively for business for the first two years, input value-added tax is not recalculated under subsection 30 (7) of the Value-Added Tax Act. The first recalculation is done in December 2021 under subsection 32 (4), allowing for the one-year condition set out in subsection 30 (8). Accordingly, regardless of the fact that in 2021 the passenger car was used in both business and private consumption for 9 months and for business only for 3 months, the limit on input value-added tax deduction is 12 months.

Therefore, in December 2021 a recalculation has to be done, 50% of 800 (4000/5), i.e. 400, euros may be deducted in 2021, whereas 800 euros (4000/5) has been deducted for that year. Thus, additionally payable value-added tax should be calculated at 400 euros (800 – 400), stated in cell 10 on the 2021 December value-added tax return.

No recalculation is done for 2022.

at the time of the purchase of a passenger car, input value-added tax has been deducted 100% as per subsection 30 (4) of the Value-Added Tax Act, and the passenger car is going to be used for the purposes not specified in clauses 30 (4) 2) to 5) of the Value-Added Tax Act.

Example:

A passenger car is acquired in January 2018 at the price of 20 000 euros + 4000 euros in value-added tax, and 100% of input value-added tax (4000 euros) is deducted at the time of the purchase. A car is used 100% in business until June 2019, from July 2019 it is also used in part for private purposes, and the car is sold in February 2020.

Under subsection 30 (7) of the Value-Added Tax Act, if within two years a passenger car is put to use in private consumption, any input value-added tax deducted has to be recalculated. Accordingly, if the vehicle is taken into private consumption, a correction has to be made on the January 2018 value-added tax return and 50% of the deducted value-added tax (2000 euros) has to be declared again for state revenue (cells 5, 5.2, 5.3).

In the case of this example, under subsection 32 (4) of the Value-Added Tax Act, a new recalculation will have to be done in February 2020, when the vehicle is sold. Recalculation is based on the fact that input value-added tax may be deducted 50% for the first 2 years and 100% for the subsequent three years. Hence, 2400 euros (3 × 800) may be deducted for three years, and 1200 euros (3 × 400) has been deducted for three years at the time of the purchase of the passenger car. Thus, 1200 euros (2400 – 1200) in input value-added tax is additionally deducted, declared in cell 11 on the February value-added tax return.

Procedure for the use of a personal passenger car for business trips

A benefit for the use of a personal passenger car for business trips may be paid:

for an official;

for an employee (for the purposes of the Contract Act);

a member of a management or control body (for the purposes of section 9 of the Income Tax Act).

Thus, for example, no tax-exempt benefit may be paid to the owner of a company or to a party providing a service under a contract under the law of obligations under the cited regulation. However, they may be reimbursed for costs incurred on behalf of a legal person under subsection 12 (3) if there is documented evidence for it.

A benefit may be paid for the use of a passenger car not owned by or in the possession of an employer. Hence, a passenger car does not have to be in the user’s personal possession; however, its right of use has to be proven. The right of use is stated either on the registration certificate of the vehicle or in a power of attorney prepared by the owner. Category M1 and M1G vehicles are considered passenger cars. Where a benefit is paid to a disabled person, exceptionally the costs of the use of any motor vehicle may be reimbursed. Under the Traffic Act (section 12), a vehicle powered by an engine is considered a motor vehicle. A vehicle is a means of transport powered by an engine or in another way, designated for road traffic or driving on the road.

For the payment of a benefit, a written decision, directive or order of the employer has to be formalised, showing the details of the person receiving the benefit, the amount of the benefit and the date of the trip or the period during which trips completed will be reimbursed. A copy of a document proving the right to use a passenger car is attached to the written decision. A decision may be made also in relation to a period longer than one calendar month.

A tax-exempt benefit may be paid only when records, that is, a travel log, are kept for business trips. A travel log has to include the details of the person using the passenger car, the details of the registration plate of the passenger car, the start and end readouts of the odometer for every business trip and the date of the trip and the purpose for every trip. The format in which a travel log is kept, e.g. either on paper or electronically, is irrelevant – it is important for it to include the above information. As a result, a tax-exempt benefit cannot be paid for future trips but rather only for trips already completed.

If a benefit for the use of a personal passenger car is paid without keeping records, the disbursement is income from employment that has to be declared in a personalised manner in Annex 1 (Annex 2 in the case of a non-resident) to TSD.

Based on a travel log, business trips may be reimbursed up to 30 cents per kilometre but not more than 335 euros for trips completed in a calendar month. This means that an employer may also set a lower kilometre price, e.g. 20 cents; however neither limit may be exceeded in order for the condition of the tax exemption to be met. Hence, if the kilometre price of a benefit has been set at, for example, 1 euro, the portion exceeding the kilometre price cap, or 70 cents, is taxable, irrespective of how great the benefit amount is in total.

A benefit may be paid to an employee also on an aggregate basis, that is, more than 335 euros on accruals basis in a calendar month; however, it is important that a benefit calculated for any single month does not exceed the stipulated limit.

Any benefit amount exceeding limits is considered a fringe benefit. If the calculated benefit amount for the calendar month works out to be greater than the limit, the fringe benefit is calculated separately for each month, and the fringe benefit has to be declared in the month when the benefit has been disbursed.

If accounting are kept, a natural person may receive tax-exempt benefits also from multiple employers, with the cap of 335 euros applied to each employer separately. A benefit includes all the costs related to the normal use of a car (including fuel, parking etc.).

The kilometre price and tax-exempt limit set in the regulation are not linked to actual costs (documents detailing the costs). Whilst subsection 12 (3) of the Income Tax Act does state that the income of a natural person is not a documented cost reimbursement provided for the benefit of another party, it also adds that this subsection is not applied to a benefit the taxation of which is subject to separate conditions and limits. Since separate conditions and limits have been set for a benefit paid for the use of a personal passenger car, reimbursement of the use of a passenger car (e.g. payment of a parking fee, tyre replacement, running costs of repairs or the like) on the basis of documents detailing the costs is a fringe benefit.

Exceptionally, the costs of a personal passenger car may be reimbursed based on a document detailing the costs if travel on secondment is completed using a personal passenger car, and these costs are reimbursed based on the so-called regulations concerning missions.