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Rules for VAT deduction on car rentals has changed

Fed up with administration? You can automatically reclaim half of the VAT for your rented cars from January!

Balázs Földes
Car key
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From the beginning of January 2019, the rules for VAT deduction on car rental has changed. In some cases, it is worth for the renter to reclaim 50% of the VAT instead of the often lengthy administrative procedure.
From 1st of January even for rental cars taxpayers can simply reclaim 50% of the VAT of the rental fee instead of using the actual proportion of business usage. This will allow businesses to get rid of the time-consuming and often risky administration (e.g. mileage records, documentation, answering questions from the Tax Authority).

The new rule applies to most of the companies using company cars, as it also covers both operational and open-end finance leasing besides car rental. At the same time, the law still leaves the taxpayer the possibility of ignoring the automatic deduction: in this case, everything remains as it was, that is, the proportion of the business usage can be deducted, but this should be based on records and backed by supporting documents. After the introduction of the new option, the Tax Authority will probably more closely monitor taxpayers using high-rate deductions than before, and therefore the deduction based on actual use is a riskier choice.

In practice, it is worth keeping mileage records and deducting more VAT on the rent for companies, who use their cars for business purposes in great proportion. On the other hand, even the 50% simplified deduction is to be used only if there is evidence of at least some business usage of the company cars. Where company cars are only a kind of a benefit to the employees, the taxpayer cannot, in principle, exercise any right of VAT deduction.

As before, the deduction of VAT on purchase of cars and fuel, tolls and parking fees, and any products needed to maintain or operate a car will continue to be subject to a general VAT deduction prohibition. Also, the 50% VAT deduction ban continues to apply to other services required for maintenance (eg. repair, service).