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Personal vehicles costs and representation costs – the dearest business expenses of Croatian entrepreneurs (Part I)

Since we do business in Croatia and we are characterized by showing social status through “a good car and respect”, and motivated by the frequent misunderstanding of the accounting and tax treatment of vehicles and hosting by entrepreneurs, we decided to share a little information on this topic.

Many entrepreneurs often think that everything can be booked as a business expense. A good number of accountants, fearing for their job or ignorance, really book everything and anything into a business expense because that’s what the owner wanted, others can and it all goes like that until…

Anything can be booked, but the real question is whether it is a justifiable business expense as well as a tax-recognized expense?

In the simplest terms, only what is related to the realization of income can be accepted as a business expense, and the income is related to registered activities.

On the other hand, a tax-deductible expense is that expense that the tax officials will recognize in the event of an audit as an amount that reduces your income and thus reduces income or profit. And it is very clearly prescribed what can and cannot be tax-deductible.

Therefore, it is advisable to choose a good accountant who will be able to guide you in the regulations because control is possible several years back. Interest will be calculated on the tax that you were obliged to calculate, but you did not, and you will also receive a fine.

Here, we will not deal with all business and tax-recognized and unrecognized business expenses, but only refer to the costs of personal vehicles and representation expenses.

Let’s start with the vehicles!

The problem is not the commercial vehicles that are really used for the performance of activities. With them, all costs are 100% recognized, as well as the associated VAT.

The problem arises with personal vehicles, especially the bigger and more beautiful ones, which enhance the self-image of strength and power for entrepreneurs, and easily catch the eye of tax collectors.

The issue of the tax treatment of personal vehicles is always an extremely topical issue during the inspection by the Tax Administration. Especially when the receipt in kind is not calculated for vehicles (explained in more detail below), which is particularly interesting for taxpayers.

In the tax regulations, there is no connection between the type of vehicle and the type of activity performed by the entrepreneur. For example an entrepreneur dealing with some kind of intellectual services can include all driving expenses in business expenses if he acquires a delivery vehicle. He will probably agree that, considering his activity, such a vehicle is unnecessary for him and that it will not be of use to him in business, but the tax regulations do not recognize this connection. On the other hand, all personal vehicles worth up to HRK 400,000 (which is not a small amount) have the same tax treatment: be they luxurious or modest, new or used… According to the current regulations, VAT on acquisition and use costs is not recognized at all, and the costs themselves are tax recognized up to 70% of the amount.

From the beginning of 2018. 50% of input tax (VAT) from such accounts will be recognized, but also only 50% of the cost (reduction).

On one occasion, I heard the statement of an entrepreneur who privately uses several vehicles owned by his company: “My accountant told me that the state does not recognize 30% of the vehicle costs because she knows that we use them for private purposes and that everything is settled with that.”, which is just another example of misinterpretation

It is true that the “state” has foreseen the use of the vehicle for private purposes, so it does not recognize 30% of these costs, but that does not mean that it has allowed it, i.e. tax recognized use for private purposes.

The tax base of the profit tax is increased by 30% of the costs with the corresponding value added tax, according to the status of the individual vehicle

  • for passenger vehicles owned by entrepreneurs and in financial leasing: costs of fuel and oil, maintenance and repairs, registration and depreciation,
  • for rent-a-car services, the fee charged plus fuel costs,
  • for leased vehicles (operating leasing): contract fees, fuel and maintenance costs and all other costs borne by the lessee under the lease agreement.

The 70:30 split applies to passenger vehicles used only for business purposes. This means that after working hours the vehicle is parked in/in front of the company’s business premises where it is kept until the next working day.

In order for the 70:30 division to be tax-acceptable, it is necessary to have a record of the kilometers driven, which undoubtedly proves that the complete mileage of the specified vehicle is used for business purposes.

For “public” use for private purposes, acceptance of vehicle costs in full and tax-recognized status, the additional criterion of salary calculation for receipt in kind or other income to a person who uses an official vehicle for personal needs must be met.

There are several methods of calculating the amount of salary in kind or other income as a basis for calculating the corresponding taxes and contributions:

1.) 20% of the value of the loan installment, operational leasing or rental for a used vehicle increased by the corresponding VAT or

2.) 1% of the purchase value of the vehicle plus VAT when purchasing (owned vehicle) or financial leasing, and

3.) with the mileage records, the basis of receipt in kind can be determined as the product of the sum of the number of kilometers traveled by the employee for private purposes and HRK 2.00 per kilometer driven.

You should not look negatively in advance at the calculation of salary in kind or other income, because part of the expenses that you will have based on the calculation of salary in kind will be returned to you through a reduced profit tax because the vehicle costs are 100% recognized when the receipt in kind is calculated.

Private vehicles can also be used for business purposes and a cost of HRK 2.00 per kilometer driven for business purposes is recognized, but even then entrepreneurs must provide detailed records of the use of the vehicle for business purposes. Of course, all travel expenses are related to employment because if there are no employees in the company, all travel expenses are the net amount of other income on which the corresponding contributions and taxes are paid.

Depreciation of means for personal transport is recognized as an expense, i.e. reduces the profit tax base, up to HRK 400,000.00 of the purchase value per vehicle. In other words, if you want a luxury personal vehicle worth more than HRK 400,000, no one will prevent you from doing so, but they will recognize the cost of depreciation only up to a total of HRK 400,000. This limitation also applies to the deduction of input tax (VAT). The exception to the above applies only when the personal vehicle is used exclusively for the registered activity of rental or transportation. For example when it comes to the business of renting a vehicle or a taxi service, regardless of the amount of the purchase value, the entire purchase cost represents tax-deductible depreciation.

In conclusion, there are exceptions to the rule of non-recognition of 30% of vehicle costs, when the said costs are recognized in full:

  • insurance costs, interest, motor vehicle tax and boat tax are recognized in full
  • if the private use of means of transport is recorded as payment of wages in kind, as previously stated, then these costs are recognized in full,
  • if the entrepreneur carries out an activity in which means of personal transport are used exclusively for the performance of these activities, such as: driving schools, taxi services, activities of execution/maintenance of gas, water and other installations, emergency interventions, road and water assistance, rental means of transportation, etc.

From all of the above, it follows that the recognition of expenses from the point of view of income tax depends on how the entrepreneur’s personal vehicles are used and whether wages in kind are calculated for them. First of all, it is necessary to distinguish between two cases:

  • The official personal vehicle is used for private purposes, and the company calculates the salary in kind for the employee, and other income for the unemployed. In this case, all costs, except depreciation of the amount exceeding HRK 400,000 of the purchase value, are 100% tax-recognized costs.
  • An official personal vehicle is used only for official purposes. It must be parked in front of the company’s headquarters before and after working hours, and employees do not have the right to use it for private purposes. With such vehicles, most costs are treated as 70% tax-recognized and 30% non-recognized costs, and employees are required to keep mileage records.

From 1. January 2018 entrepreneurs – VAT payers when purchasing a personal car will be able to deduct 50% of the input tax (compared to the current 0%) and 50% of all costs incurred in connection with the use of personal vehicles (compared to the current 70%) will be recognized for tax purposes, if salary in kind is not determined based on the use of personal vehicles.

The continuation of the cost of representation will follow in our next post.

Until next time ……..