VAT deduction for passenger cars will be limited

In the consolidation package just approved, the possibility of deducting VAT is reduced to a maximum of CZK 420,000. The change, planned to take effect from 1 January 2024, will affect almost all vehicles in the M1 category.

According to the proposed transitional provision, the new regulation will apply only to deductions arising after the amendment comes into force. This would mean that the deduction on the advance paid in 2023 could exceed CZK 420,000 even if the car is not actual delivered until 2024.

Example 1

The taxpayer orders a passenger car of category M1 in 2023 at a cost of CZK 5 million excluding VAT. The car is to be delivered in April 2024. If the taxpayer pays an advance payment of the total amount including VAT, i.e. CZK 6,050,000, according to the current wording of the amendment, they will still be able to deduct the entire VAT of CZK 1,050,000 in 2023 and this deduction will not be reduced in any way upon delivery in 2024. If the taxpayer did not pay any advance payment in 2023, they would be able to claim a deduction of only a limited amount of CZK 420,000 for its delivery in 2024.

If the taxpayer acquires a car that will be partly used privately - either by a sole trader or by an employee of the taxpayer – the proportional deduction will also be calculated from the limit amount of CZK 420,000.

Example 2

Employees of a business corporation can use a company car as a benefit for private purposes. When purchasing a car, a proportional deduction coefficient is set equal to the expected proportion of mileage for private and business travel. Say that in March 2024 the corporation purchases another passenger car and assume a mileage ratio of 70% business and 30% personal for the purchase. The value of the car, excluding VAT, is CZK 4 million and the VAT on the invoice is CZK 840,000. The business corporation is entitled to claim a pro rata deduction of 70% (in the amount of business trips), but not on the amount of tax on the document (on CZK 840,000), but only 70% of the limit set by law, i.e. on the amount of CZK 420,000.

If the taxpayer exhausts the limit of CZK 420,000 when purchasing a passenger car in category M1, they will not be able to claim any deduction for subsequent technical improvements of the car.

As is clear from the consolidation package and the explanatory memorandum, the limitation of the deduction for the purchase of passenger cars as goods is not affected. The full entitlement to the deduction will continue to apply to these. It will only be reduced when the car is sold to the end customer.

Example 3

A car dealer buys 10 passenger cars from a car company at a unit price of CZK 3 million excluding VAT. Since they buy the cars for resale as goods, they can claim the full deduction on each car purchased, i.e. CZK 630,000. A customer who subsequently buys a car from a dealer will have a maximum deduction of CZK 420,000.