Consolidation package may negatively affect VAT on lease and resale of cars above set limit
The government's consolidation package limits the right to deduct VAT for passenger vehicles in category M1 with a purchase price of over CZK 2 million. This will have a negative impact on the lease of passenger cars with a purchase price above the set limit, involving both finance and operating leases. The subsequent resale of these used vehicles will also be affected. Was this the legislators’ intention, or did they just fail to fine-tune the proposed wording?
The chamber of deputies has approved the government's draft consolidation package in the first reading. The second reading should be on the agenda at the beginning of September when possible amending proposals shall also be debated.
The regulation limiting the right to deduct VAT (by the purchase price of CZK 2 million) essentially copies the same limit in income tax area – concerning tax-deductible depreciation of fixed assets. In income tax, however, the limit explicitly does not apply to taxpayers who provide cars under finance lease arrangements. In its explanatory report, the government clarifies that the intention is to limit only the leased cars’ end users and not their providers. The limit thus does not have to affect both parties to the lease contract. As the explanatory report further states, the lessors may also provide cars to end users buying a car for their personal use, and the regulation does not intend to limit such situations. In the case of operating leases, the limitation of deductible expenses for income tax purposes only affects the lessor, with no limitation on the part of the lessee.
The draft amendment to the VAT Act does not contain a similar exemption from the limitation of the right to deduct VAT for leasing companies. Given the current accounting classification of vehicles in the fixed assets category of leasing companies, the right to deduct input VAT will be limited twice: on the part of the leasing companies and on the part of their customers. Vehicles (with a purchase price of over CZK 2 million) provided under operating lease arrangements will also be, in principle, subject to double taxation from a VAT perspective.
Yet another issue to consider are the tax implications of the proposed limitation upon the subsequent sale of a used car at a selling price above CZK 2 million. Even if the right to deduct is not claimed on the full purchase price, the entire selling price of the used vehicle will be subject to value added tax.
We believe that the proposed wording of the amendment to the VAT Act resulting from the consolidation package will be fine-tuned during further debate in the chamber of deputies so that the basic principles of VAT neutrality are not compromised, and double taxation does not occur.
The tax changes introduced by the consolidation package are summarised here.