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VAT on vehicles

TAXATION OF THE PURCHASE OF VEHICLES FOR BUSINESS PURPOSES

Following on from the article on the deduction of expenses for corporate income tax purposes, we will now inform you about the application of VAT to vehicle-related purchases and expenses.

VALUE ADDED TAX (VAT)

The right to deduct Value Added Tax is regulated in Chapter I of Title VIII of Law 37/1992 of 28 December 1992 on Value Added Tax (Official State Gazette of 29 December 1992).

Article 95 of Law 37/1992 provides as follows:

"(.../...)

Three. Notwithstanding the provisions of the preceding paragraphs, the amounts paid for the acquisition, importation, leasing or other transfer of use of capital goods which are used in whole or in part in the pursuit of the business or professional activity may be deducted in accordance with the following rules:

1a. In the case of capital goods other than those covered by the following rule, to the extent that such goods are foreseeably used, according to sound criteria, in the course of the business or professional activity.

2a. In the case of passenger cars and their trailers, mopeds and motorbikes, they shall be presumed to be used for carrying out the business or professional activity in the proportion of 50 per cent.

For these purposes, passenger cars, trailers, mopeds and motorbikes shall be considered to be those defined as such in the Annex to Royal Legislative Decree 339/1990, of 2 March, approving the text of the Law on Traffic, Circulation of Motor Vehicles and Road Safety, as well as those defined as mixed vehicles in said Annex and, in any case, those known as all-terrain or "jeep" type vehicles.

By way of derogation from the provisions of this rule 2a, the vehicles listed below shall be presumed to be used for the conduct of the business or professional activity to the extent of 100 per cent:

(a) Mixed vehicles used for the carriage of goods.

(b) those used in the provision of passenger transport services for consideration.

(c) those used in the provision of driver or pilot training services for remuneration.

(d) those used by their manufacturers in testing, trials, demonstrations or sales promotion.

(e) those used for business travel by commercial representatives and agents.

(f) Those used in surveillance services.

(.../...)

Four. The provisions of the preceding paragraph shall also apply to the quotas borne or paid for the acquisition or importation of the following goods and services directly related to the goods referred to in that paragraph:

1o. Accessories and spare parts for the aforementioned goods.

2. Fuels, combustibles, lubricants and energy products necessary for its operation.

3rd Parking services and use of toll roads.

4o. Rehabilitation, renovation and repair of the same.

According to recent interpretations on this issue, 50 % of VAT would be deductible in the same way as has been said in the case of corporate tax.

Formally, an invoice would have to be made out in the name of the worker-partner or employee (as if the use of the vehicle were transferred to a third party), and the worker would pay the VAT and the company would pay the VAT. In practice, however, it is normal for the company not to charge the VAT to the worker-partner or employee, but for the company to assume this VAT and charge it as a higher payment in kind on the payroll (explained in the following point), so that what the company deducts on the one hand, it pays in on the other, and the final effect is neutral with respect to the 50% of the private use.

Therefore, for practical purposes, what should be done is to deduct only 50 % of the costs of vehicles that are used 50/50 for business purposes.

Note: Recently the Courts have ruled in favour of 100% deduction of input VAT on purchases and expenses related to company vehicles.