Since the beginning of 2013, the Value Added Tax Act (VAT Act) is a bit more liberal as far as VAT credit right for cars is concerned. Under the current provisions, the VAT Act allows VAT credit on rental payments and maintenance, repair, improvement and operational cost of a rented car.
The VAT Act also defines that if a company acquires a car and the car is only rented to another entity, then the company is entitled to a tax credit right for the acquired vehicle.
In this article we will consider the case, where renting a car is not the main activity of the acquiring company (as well as the following activities are also not within its main activities: transport and security services, taxi services, courier services or car drivers testing & practicing, selling vehicles).
Let us assume that we have not one, but two Bulgarian companies, within a small informal holding group, as both companies are registered under the VAT Act.
- The first company will acquire the car and will use the VAT credit.
- The first company will lease the car to the second company and will charge 20% VAT on the issued invoices for the rent.
- The second company will use the VAT credit right for the received rental invoice, as all for all maintenance, repair, improvement and operational expenses.
- The rental price should be determined as a fair value.Note: This is a principle model and each concrete case should be considered separately, so that the practical implementation is confirmed. For example, the model generally determines the right of VAT credit for the car, but the tenant should use the car for performance of VAT taxable deals. In addition, certain circumstances on both companies can sometimes form an artificial model which is not tax acceptable.