Potential 50% limitation of the VAT deduction right related to the hire or leasing of motorized road vehicles

Based on this proposal for a Council Decision (“the Proposal”), Romania would be allowed to limit at 50% the right to deduct the VAT on the domestic and intra-Community acquisitions, importation, hire or leasing of qualifying motorised road vehicles and the VAT charged on expenditure related to those vehicles, where the vehicle is not entirely used for business purposes.

The novelty is represented by the 50% limitation of the VAT deduction right relating to the hire and lease of motorised road vehicles.

The rest of the provisions of the proposed Council Decision (i.e. qualifying motorised road vehicles, 50% limitation of the VAT deduction right for domestic and intra-Community acquisitions and imports of motorised road vehicles and related fuel expenses) seem to be already included, to a large extent, in the Romanian tax law as of 1 January 2012. Though, the current text of the Proposal contains some different wording, which still leaves room for interpretation.

There is no clear date when this Proposal will be adopted, but we would expect that this happens in the next couple of months. We will keep you updated on any developments in this respect.

If this Proposal passes, hire and leasing of vehicles would, in most circumstances, no longer offer any VAT benefit, eliminating thus a competitive advantage of leasing companies.

We expect that this rule is applied to on-going lease/hire contracts and not only for the future.

Market players need to review the current hire/leasing arrangements to see how they can prepare in case these new rules are implemented.

By Venkatesh Srinivasan, Partner – Head of Tax and Legal, Ernst & Young Romania

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