Good news for entrepreneurs! As of June 1 of this year, the threshold for representative cars has been raised - from 50,000 to 75,000 euros. Let's look at how these changes affect taxes and other nuances related to the accounting of a representative car. Recently, a sharp increase in the prices of new and used cars has been observed in the market, which is related to both the increase in inflation and the increase in the price of raw materials, electricity and general goods and services, as well as the lack of electronic chips in cars.
What is a representative car?
Since January 1, 2014, the Corporate Income Tax Law (VAT Law) has defined that a representative car is one whose value excluding value added tax (VAT) exceeds 50,000 euros. So, previously, when car prices were lower, companies had the opportunity to buy cars for work without reaching the aforementioned threshold and without increasing the tax burden. Currently, cars of the same class, which previously did not exceed the threshold of 50,000 euros, exceed it.
In addition to the CIT law, a representative car is:
- passenger car, the number of seats, excluding the driver's seat, does not exceed eight seats;
- a car other than an emergency vehicle or a special passenger car (Ambulance, motor home or hearse, or a car equipped to transport persons with disabilities);
- a car , other than a new passenger car used as a demonstration car by an authorized motor dealer;
- a lorry with a gross weight of up to 3000 kilograms, registered as a cargo van and having more than three seats (including the driver's seat), if classified as a lorry, but it is essentially a passenger car.
A representative car is not only purchased by the company, but also one that is rented. The aforementioned threshold of 50,000 euros also applies to rental cars, but its value is determined differently. For vehicles that are leased with the right of redemption, the value specified in the lease agreement is taken into account. But for those that are leased without the right of redemption, the value specified in the insurance contract should be taken into account if it is not specified in the lease agreement.
It should be noted that this does not mean the possibility for the company to rent a car that exceeds the indicated threshold, if the value in the contract is determined that does not correspond to the real value and to apply tax advantages, because identifying this fact qualifies the rental expenses as related to a representative car.
In addition, it is stipulated that for the purposes of tax calculation, when determining the purchase value of a representative car, the costs of improvements made to it in the 12-month period after the purchase of the car are taken into account.
The tax changes along with the threshold
Well, at least for a while, companies will be able not to worry about the current representative car threshold - the Saeima has adopted amendments to the CIT law, determining that for cars purchased after June 1, 2023, the representative car threshold has been increased to 75,000 euros.
Increasing the above-mentioned threshold will affect the potential tax revenues in the state treasury, therefore a decision has been made to change also the rates of the light vehicle tax (UVTN) for companies and the procedure by which they are calculated.
Until now, UVTN rates depended on the car's engine volume, but from July 1, 2023, they will be determined based on the car's maximum power in kilowatts. The exception to which the constant rate will continue to be applied is the electric car, but there is also an increase in this position - if until now the UVTN electric car was 10 euros per month, then the UVTN will be 15 euros in the future. The other exception for which the UVTN will not be determined based on the vehicle's maximum output in kilowatts is a plug-in hybrid vehicle. From July 1, 2023, the UVTN will be 25 euros.
It should be noted that UVTN rates will be determined according to the maximum engine power in kilowatts for vehicles registered for the first time after January 1, 2009. For vehicles registered for the first time before January 1, 2009 or those whose registration certificate does not indicate the maximum power of the engine in kilowatts, the UVTN rate of 60 euros is applied.
Those companies that have already paid UVTN for the entire year 2023 will have to pay the increase difference before the technical inspection of the car. UVTN rates for a specific company car can be viewed on the website of the Road Safety Directive.
Vehicle operating tax
Companies, just like private individuals, have to pay a road tax (TEN) on almost all internal combustion vehicles. Exceptions for which tax is not payable are:
- vehicles granted historic vehicle status;
- electric cars;
- diplomatic, consular or international organization vehicles with diplomatic or consular privileges and immunities;
- operational vehicles;
- a vehicle registered in the ownership, possession or possession of a person with a disability;
- a vehicle whose owner, keeper or the owner has a dependent child with a disability.
The amount of TEN payment for cars registered for the first time starting from January 1, 2009 depends on the amount of CO2 emissions of the car per kilometer - the amount varies from 0 to 756 euros. It is also determined that for cars with an engine volume greater than 3500 cm3, 300 euros must be added to the tax payment.
TEN applicable relief in the amount of 25% for trucks, trailers or semi-trailers of an agricultural product manufacturer, agricultural service cooperative society and a recognized aquaculture farm, designed to transport various loads. The relief is also applicable to a person who is included in the database of payment recipients of the Rural Support Service and carries out freight transport.
Based on the above, it is worth thinking about why Latvia, in an effort to promote the reduction of CO2 gas emissions, applies UVTN to electric cars, but does not apply TEN. In an effort to promote the electric car as a CO2-neutral means of transportation, it would be valuable not to apply UVTN, thereby creating interest in companies to supplement or replace their fleet with an electric car.
And what about VAT?
The Value Added Tax Law (VAT Law) stipulates that the amount of tax for the purchase, rental and import of a passenger car, the number of seats, excluding the driver's seat, does not exceed eight seats from the amount of tax to be paid as VAT input tax. Similarly, the amount of tax on the purchase, rental and import of a truck (gross weight up to 3000 kilograms) is not deductible if it is registered as a cargo van and has more than three seats (including the driver's seat). If the value of said cars meets the aforementioned threshold, the car is considered a representative car. It is also established that the VAT input tax is not fully deductible on the costs related to the representative maintenance of cars, including the costs of fuel purchases and repairs.
There are also certain exceptions, when the above-mentioned VAT deduction norms are not applicable, among others, if the car is used for the provision of taxable transactions (in this case, the accounting of journeys related to the performance of economic activity must be ensured using global positioning systems registered with the State Revenue Service (SRS) GPS) control system).
The aforementioned VAT deduction norm does not apply to cases in which a car is purchased for taxable transactions, e.g.
- for passenger transportation for remuneration, including the provision of taxi services;
- the provision of car rental services;
- the sale of automobiles or installment purchase transactions;
- the provision of goods transport services;
- the provision of driving skills training; the provision of security services.
This also applied to:
- for operational vehicles;
- for cars that are used as demonstration cars for car dealers;
- the car is used for the provision of taxable transactions (in this case, the accounting of trips related to the performance of economic activity must be ensured using a global positioning system (GPS) control system registered with the State Revenue Service (SRS) ).
VAT is deductible for fuel (or in the case of electric cars – electricity) expenses of representative cars used in economic activity. In cases where accounting is done with GPS, VAT is 100% deductible, but in cases where GPS is not installed or registered with SRS, VAT is not deductible.
The VAT Law stipulates that, if the above requirements are met, the VAT input tax is deductible for fuel expenses, based on the number of kilometers actually driven and not exceeding the city cycle fuel consumption rate specified by the manufacturer by more than 20%.
Special attention should be paid to changes in city cycle fuel consumption norms on the part of car manufacturers. For the most part, the average consumption of the city is indicated from tests carried out using the conditions of the New European Driving Cycle (NEDC), but since 2017 new tests have been introduced - the Worldwide Harmonized Light Vehicle Test Procedure (WLTP). Their aim is to provide a more realistic understanding of a car's fuel consumption.
The main differences between the NEDC and the WLTP test:
- greater test dynamics with the aim of better representing real driving behavior;
- an increase in the average speed from 34 to 46.5 kilometers per hour, but an increase in the maximum speed to 131 kilometers per hour;
- changes in the ambient temperature of the tests - NEDC tests were carried out at a temperature of 20-30 degrees, while WLTP the specified temperature is 23 degrees;
- changes in the driving phases, making them more dynamic (52% of the journey is made in the city and 48% on the highway);
- more than twice the distance of the test drive (certainly 23.25 kilometers in the case of WLTP; extended from 20 to 30 minutes test duration;
- the WLTP test takes into account other car indicators that affect CO2 and fuel consumption.
Based on these changes, for cars equipped with internal combustion engines, the city consumption in the WLTP is higher than in the NEDC tests. This is positive, because the consumption is determined more accurately corresponds to a real daily driving situation.
The question arises - what is the understanding of the SRS regarding which of the city's fuel consumption test results is taken into account for the purpose of deducting input VAT? As SRS consultants explained in a telephone conversation, in cases where readings from both the NEDC test and the WLTP are available, the results of the WLTP are taken into account for the purpose of deducting input VAT.
In order to actually judge the differences between the NEDC and WLTP tests, let's look at a specific car.
Example
2022 BMW X1 all-wheel drive car with 2 l gasoline engine. It is possible to buy this car new under the threshold of 50,000 EUR, which means that even until June 1, 2023, this car cannot be considered representative. The city fuel consumption determined in the NEDC test of the particular car is 5.1 l/100km, but 6.8 l/100km in the WLTP.
As can be seen, the possible rate of input VAT deduction in the case of WLTP is one third higher than that determined in the NEDC test. According to the NEDC test result, the VAT input tax of this car could be deducted for every 6.12 liters per 100 kilometers, but according to the WLTP result, they would be 8.16.
In conclusion, I would like to remind you that all entrepreneurs must now review the value of their vehicles purchased so far and, if necessary, reclassify them from the status of representative and ordinary vehicles, taking into account the changes.