In Focus

Ruling issued by the NRA regarding the right to deduction of input VAT for lease or rental of passenger vehicles

July 2, 2013

On 26 June 2013 the National Revenue Agency of Bulgaria (NRA) has issued Ruling No 91-00-88/26.06.2013 regarding the right to deduction of input VAT for leased and rented passenger vehicles. The Ruling has been issued as a result from numerous queries addressed to the NRA in connection with the amendments to the VAT Act in force as of 1 January 2013 introducing back the provisions related to input VAT for passenger vehicles which were effective before the accession of Bulgaria in the EU, namely:

• No right to deduction of input VAT is available for acquired passenger vehicles (including for the costs on their maintenance, repair and exploitation), and respectively
• Right to deduction of input VAT is available for rented passenger vehicles (including for the costs on their maintenance, repair and exploitation).

The introduction of the old provisions regarding the right to deduction of input VAT has been prompted by a letter of the European Commission EU Pilot 2781/11 according to which Bulgaria should have kept the limitations concerning input VAT deduction for passenger vehicles the same as before the accession in the EU.

In practice the rental contracts are often drafted as operating lease contracts. In the commented Ruling  the NRA provides for a guidance regarding which lease contracts shall be viewed as cases of “acquisition” of passenger vehicles and which as rental of passenger vehicles. The NRA adopts the approach of the Court of Justice of the European Union (ECJ) applied in its Decision on Case C-118/11 - Eon Asset Management stating that operational leasing shall be accepted as a rental contract and the financial leasing as a contract for acquisition of asset. The Decision refers to the criteria for qualification of financial lease contracts laid down in the International Accounting Standard (IAS) 17 - Leases.

1. Type of the lease contract

Following the principle of substance over form, in the commented Ruling the NRA generally states that contracts under which all risks and benefits arising from the ownership are transferred shall qualify for finance lease. Hence, no right to deduction of input VAT on passenger vehicles “acquired” under such contracts shall be allowed. The following concrete criteria for qualifying a lease contract as finance lease contract are indicated in the NRA Ruling:

a/ the existence of a clause for transfer of ownership at the expiry of the contract, and/or

b/ the present value of the total amount of leasing installments is practically identical to the market value of the goods.

It is expressly stated that even if there is no clause for transfer of ownership in the contract, in case such a transfer actually takes place, then the contract shall be qualified as financial leasing contract.

It is concluded that transaction in which the circumstances under points a/ and/or b/ above exist shall be viewed as acquisition of fixed asset even if the contract is named as a rental contract. Respectively, no right to deduction of input VAT shall be available for passenger vehicles “acquired” through such transactions.

Apart from the above, as far as the ECJ and the NRA ground their opinion on the IAS 17 - Leases, it shall be taken into account that a new International Financial Reporting Standard concerning leases is expected to enter into force. The latter may lead to different qualification of some lease contracts and thus, to different VAT treatment.

2. Applicability of the new provisions

The NRA clarifies in the Ruling that the right to deduction of input VAT shall be available for taxable events after 1 January 2013 regardless of the date on which the contract for rental of passenger vehicles is executed. This leads to the conclusion that the revenue authorities may try to limit the right to deduction of input VAT only with respect to rental/lease payments due after the entry into force of the commented amendment to the VAT Act.

Despite the contents of the commented Ruling, the ECJ has stated many times in its practice (cases No C‑138/12, С-282/10, C‑566/07, C‑309/06) that if the national legislation of a Member State contradicts the legislation of the EU (in this case Directive 2006/112/EC) then the taxpayers may directly apply the rules of the respective EU legislation. In the particular case this should mean that as far as the provisions of the Bulgarian VAT Act during the period between 1 January 2007 - 31 December 2012 were contradictory to the EU legislation, then the Bulgarian taxpayers are entitled to apply directly Directive 2006/112/EC for the quoted period and exercise their right to deduction of input VAT in respect to rented passenger vehicles.

From practical viewpoint, the right to deduction of input VAT regarding rented passenger vehicles for the periods before 1 January 2013 shall be in accordance with the general rules of the VAT Act applicable to input VAT (availability of tax document, usage of the passenger vehicles for taxable supplies, etc.), the particular facts and circumstances as well as the available documents.

Should any questions regarding the information in the present newsletter arise, please do not hesitate to contact us at tel +359 2 9433700, fax +359 2 9433707, e-mail: office@afa.bg or at the postal address: 38, Oborishte Str., 1504 Sofia.

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