At the beginning of April 2018, the Central Office of the Tax Administration issued a new Directive on the tax treatment of official personal cars and other means of personal transport that are used not only for official purposes but also for the private needs of entrepreneurs and employees. This changed the tax designation of the service of using an official vehicle for private purposes, as a consequence of the newly introduced right to use a 50 percent input VAT deduction, which came into effect on January 1, 2018. VAT payers who purchased a personal car or another means of personal transport in 2018 have the right to deduct 50 percent of the charged VAT from the input invoice for that purchase as their input tax, but no more than the amount of VAT calculated on the acquisition value of the car of 400,000 kuna.
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The right to use 50 percent of the input tax is also granted to entrepreneurs who use a car based on an operational lease agreement concluded before January 1, 2018, which is realized through invoices for monthly installments related to the period from January 1, 2018. VAT payers from January 1, 2018, have the right to use 50 percent of the input tax for the purchase of fuel and lubricants, servicing, repairs, and maintenance for all cars, regardless of when they were acquired and regardless of whether they deducted input tax at the time of purchase.
It is not a delivery, but a service
Since part of the input VAT is again deducted according to the input invoices related to personal transport, the question of the tax designation of the service that the employer provides to the employee has arisen in practice if the employer allows the use of the official car for private purposes based on a contract or unilateral decision.
At the beginning of the year, the VAT Regulation came into force, according to which 50 percent of the input tax could be deducted for the use of the official car for private purposes. Just three months later, this changes, and it is hard to shake the impression that this is not a final and long-term solution to the tax complications with cars that are part of entrepreneurial assets.
Although part of the input VAT has been deducted, according to the new Directive from the Central Office of the Tax Administration, it is not a delivery, so VAT is not charged on the service provided to the employee. Since there is no taxable subject, there is also no reporting in the VAT form that the taxpayer submits for accounting periods. In the first three months, VAT payers generally acted in such a way that if they deducted VAT from the input invoice for the purchased car or for the operational lease service, and allowed the employee to use that vehicle for private purposes, they charged VAT on the delivery to the employee.
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Nothing has changed in the regulations; only the service provided to the employee is no longer considered a delivery and VAT is not charged. Accordingly, it is advisable to correct the VAT obligation based on the calculations of the use of official vehicles for private purposes for the first two or three months of this year. Although this is somewhat hidden in the Directive, it follows that the use for private purposes of vehicles acquired during the period when regulations allowed a 70 percent input tax deduction from January 1, 2018, is no longer considered a delivery. When using cars for private purposes that were acquired when the input tax deduction was not allowed, VAT is not charged according to either the previous or the new rules.
Two regulations on the same
Allowing the employee such a form of economic benefit is still considered a service provided to the employee according to income tax regulations. According to VAT regulations, it is no longer a delivery, while according to income tax regulations, it is still considered a service provided by the employer to the employee. If the employee does not pay the full market price for the service, it is considered that they have received a benefit in kind that is taxed in the same way as the salary they receive in cash.
Business entities will continue to treat the salary in kind based on the use of official cars for private purposes as before, i.e., they will convert the market value of that service into gross salary, calculate and pay contributions from the salary, contributions on the salary, income tax, and surtax, and report the salary in kind in the JOPPD form.
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When determining the market value of the service, it will be based on the acquisition value of the personal vehicle or the monthly installment of the operational lease, including the total value-added tax. Calculating the salary in kind is interesting for the entrepreneur because in that case, all expenses related to personal vehicles reduce the corporate tax base by 100 percent.
No more records
The most important news is that taxpayers no longer have to keep any records of the use of official vehicles, regardless of whether they calculate or do not calculate salary in kind based on the private use of those vehicles. Until now, this obligation was not prescribed by law and regulation but was determined by a directive from 2010. According to the new position of the Tax Administration, records of the use of cars should only be kept if the salary in kind is determined according to the actual extent of use for private purposes, i.e., two kuna per kilometer traveled for private needs. It remains unclear why the new rules affecting VAT calculations for the use of official cars for private purposes were not incorporated into the content of the VAT Regulation, which was amended in December 2017. Additionally, it is hard to shake the impression that this is neither a final nor a long-term solution to the tax complications with cars that are part of entrepreneurial assets.
