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Editorial – Taxation of company cars or a tax perpetuum mobile
If you bought a company car this year with a purchase price of over CZK 2 million, which is not entirely unrealistic given the increase in electromobility and car price developments over the last three years, you were in for a few unpleasant surprises when you introduced it into use.
Since January this year, provisions have been implemented in the Income Tax Act and the Value Added Tax Act that limit the tax deductible costs and the right to deduct for selected M1 vehicles¹ that meet the definition of tangible assets under the ITA.
The extraordinary COVID depreciation for income tax purposes, where you were able to fully depreciate a car in 24 months, has ended. So let’s return to the original five-year depreciation.
Another surprise is the introduction of a cap on the total amount of these five-year tax depreciation allowances. If the purchase price is higher than CZK 2 million, only a proportional part of depreciation calculated as the ratio of the amount of the expenditure limitation (CZK 2 million) and the actual purchase price of the vehicle may now be included in tax deductible costs. This limit also applies to subsequent technical improvements or additional increases in the initial price.
And we’re far from the end of the story. The purchase price of the vehicle also includes VAT, which cannot be claimed due to the limitation of the input VAT deduction to a maximum of CZK 420,000, if the deduction is fully claimed. If you use the company car partly for private travel, the relevant percentage of this 420,000 is reduced and the input price is increased again.
This leads to an accumulation of tax disadvantages because the non-deductible VAT further increases the tax-non-deductible part of the purchase price of the car - the tax-non-deductible part of the tax depreciation. In the case of a vehicle with a purchase price of CZK 3 million, excluding VAT, for a legal entity with full deductibility, the total tax disadvantage may amount to more than CZK 460 thousand. For an individual entrepreneur, the tax disadvantage can be even higher.
The curious reader will think: if I have a limit on depreciation, I can depreciate not at all or only very slowly, and get it all back through the tax residual value when I sell the car.
Wrong, because the tax residual value of capped vehicles is determined for the purposes of the sale or disposal of the vehicle as if the vehicle had been depreciated continuously over the minimum depreciation period in the manner chosen by the taxpayer, i.e. the calculation of the tax residual value is based on the calculated tax depreciation on the total purchase price without capping. The amount of tax depreciation actually claimed by the taxpayer is irrelevant for the calculation of the tax depreciation value (this should be taken into account when calculating deferred tax). Even the fall-back rule, wherein income directly related to a non-deductible expense is not taxable to the extent of that expense, cannot be applied in this situation.
This means that the taxable proceeds from the sale of a car cannot be reduced by the amount of the non-deductible part of the tax depreciation claimed or the depreciation not claimed at the date of sale. Also, output VAT is charged on the full sale price.
If the sale price of this used car is higher than CZK 2 million excluding VAT, the whole story is repeated again with the next owner finding herself in a kind of minor tax perpetuum mobile.
¹ Regulation (EU) 2018/858 of the European Parliament and of the Council of 30 May 2018 on the approval and market surveillance of motor vehicles and their trailers, and of systems, components and separate technical units intended for such vehicles, amending Regulations (EC) No. 715/2007 and No. 595/2009 and repealing Directive 2007/46/EC, as amended.