A tax authority that has information that cars are registered in a company’s name often raises questions about the circumstances of the use of these cars in order to assess whether the cars are actually used for the company’s economic activity and whether they are used for the private needs of some individuals. The latter considerations are relevant to the question of income in kind, entitlement to a deduction for value-added tax, and cost deductions allowed for corporation tax purposes.
The tax authorities usually ask for the following information in order to clarify the circumstances relevant for taxation:
- Explanations of the purpose for which the cars were purchased;
- Documentation on the purchase, payment and entry into service of the cars;
- Information on which employees of the company use the cars owned by the company;
- Information on the specific storage locations (addresses) of the cars;
- Car travel logs;
- Fuel write-off certificates;
- Copies of invoices from the fuel station(s) (with sales details), fuel purchase receipts (if fuel was purchased and accounted for by receipts);
- Copies of timesheets and business trip documentation.
Personal income tax and social security risks on income in kind
Property, services or other benefits received by a resident for free, in exchange or at a preferential price are treated as income in kind. The right to use a company car for personal purposes is included in the categories of benefits giving rise to income in kind.
When deciding whether a car is used for private purposes, the tax authority looks at whether the car is actually needed by the company or the employee to carry out his/her functions, whether the company is able to substantiate these circumstances with objective evidence (e.g. business trip documentation), whether the company has a place to store the car, whether an employee who is allowed to use a company car has a private car, the timing of the filling-up of the car and so on.
The benefit is not only the cost of the fuel, but also the value of the car itself. In such cases, the employer incurs additional personal income tax and social security contributions on the value of the income in kind.
In cases where a car is made available for use by a person who does not have an employment relationship with the company, the benefit derived from the use of the car is recognised as income for that person and, consequently, gives rise to personal income tax liability.
Value added tax risks
When cars are used for personal use, the company is liable to charge sales VAT on the value of the fuel used for personal purposes. The same rules apply to other operating expenses, where the business incurs expenses for the benefit of another person and deducts input VAT. The free use of goods or services is regarded as consumption for private purposes and is subject to sales VAT.
As the Law on VAT generally prohibits the deduction of VAT on the purchase of cars, there is generally no obligation to charge VAT on the private use of a car.
Corporate income tax risks
Depreciation and operating costs of a car may be deductible if the car:
- Actually used in the company’s business and related to its ordinary activities;
- Required to generate revenue for the enterprise.
In cases where the tax authorities consider that the car is not used in the economic activity of the company, any costs relating to the car may be classified as disallowable deductions.
Car-related CIT risks generally arise when the company: cannot justify why it objectively needs the car; cannot substantiate with any objective evidence that the car is actually being used to meet the company’s needs; is unclear which employee is using the car; etc.
The challenges linked to the use of cars in a company’s business is particularly relevant when luxury cars are purchased, as the tax authorities are very sceptical about such purchases.