Limits on Depreciation, Record Profits of Car Manufacturers, and a Possible Return Back?

As we outlined in the previous article, one of the biggest tax-law changes came into effect on January 1, 2024, impacting a wide range of tax provisions and affecting almost all tax residents of the Czech Republic. The goal of this amendment, known as the “recovery package,” was, among other things, to strengthen the state budget balance, with an expected impact exceeding 150 million CZK.

One of the most widely publicized changes was a significant restriction on the ability to purchase “luxury” cars as part of corporate acquisitions. In this context, a limit of 2,000,000 CZK was set for vehicles in category M1. These measures led to the following consequences:

• Limitation of tax-deductible expenses (deductions) on the acquisition of cars (category M1) for business purposes to 2,000,000 CZK; and

• Limitation of VAT deduction up to 420,000 CZK, i.e., 21% of 2,000,000 CZK.

The practical impact was that if a Czech company wanted to purchase a car valued at 3,200,000 CZK excluding VAT after January 1, 2024, the initial cost of acquisition would be 3,872,000 CZK including VAT. The company could then claim the maximum possible VAT deduction under Act No. 235/2004 Coll., on Value Added Tax (hereinafter the “VAT Act”) in the amount of 420,000 CZK. At the same time, the company may claim tax-deductible depreciation expenses up to a maximum acquisition cost of 2,000,000 CZK, depreciated over at least five tax periods. The total expenses including the tax impact from future depreciation and the VAT deduction would amount to 3,032,000 CZK.

The impact of the proposed changes was already reflected before the tax amendment came into effect, as reported by the news server Novinky.cz, among others. The year 2023 was extraordinarily successful for luxury car dealers, with a significant increase in sales in this market segment. This growth was largely driven by many entrepreneurs and companies seeking to renew and modernize their vehicle fleets before the end of 2023. The motivation for this time-limited activity stemmed precisely from the planned legislative changes, which limit tax benefits and other financial relief associated with purchasing “luxury” vehicles “for business.” Companies therefore aimed to complete purchases before the new rules were implemented, to preserve existing financial advantages. This trend led to record sales figures and increased activity in the “luxury” car market that year.

Despite the amendment being in force for only eight months, speculation has arisen about removing the VAT deduction limit. These speculations have materialized in a draft amendment to the VAT Act, submitted by the Ministry of Finance and approved by the Government of the Czech Republic on June 12, 2024. If the amendment passes the legislative process, two significant changes will occur. First, the current limitation on VAT deduction for “luxury” cars will be lifted. Second, the three-year exemption that allowed VAT deduction on cars exceeding 2,000,000 CZK will end. The Czech Republic received permission from the EU VAT Committee to implement these changes for the period from 2024 to 2026. After this period, the Czech Republic may request an extension of these measures for a further period.

In summary, the proposed tax package led to record revenues for car dealers and a renewal of vehicle fleets for many Czech entrepreneurs. Economically minded entrepreneurs plan another fleet renewal in three years when it will again be possible to fully claim the VAT deduction on the acquisition price of vehicles.

Mgr. Bc. Ondřej Grygar

Attorney, PORTOS, law firm, s.r.o.

Article published on the portal pravniprostor.cz