Passenger Car Leasing in VAT – Part I

In this article series, we examine the key value added tax considerations related to the acquisition and leasing of passenger cars. The use of a passenger car can take several forms: it may involve a purchase or a rental arrangement. In both cases, financing may be provided either from own resources or through a leasing structure. Each option carries its own VAT implications, obligations, opportunities, and potential risks. The summary below aims to provide guidance on these aspects.

Contents:

• VAT obligations and deduction rules of acquisitions
• VAT obligations and deduction rules for rental
• Operating lease and VAT
• Closed‑end financial lease and VAT
• Open‑end financial lease and VAT
• Reclassification risks

First and foremost, it is advisable to clarify what VAT obligations and deduction possibilities apply to the acquisition or rental of a passenger car under the general rules, without any loan/credit/leasing structure.

Acquisition of a Passenger Car

When purchasing a passenger car, the VAT Act contains particularly unfavourable provisions. Under Section 124 (1) d), as a general rule, the input VAT charged on the acquisition may not be deducted. In other words, the gross amount of the vehicle constitutes the acquisition cost, and the vehicle must be capitalised in the accounts at this gross value.

Exemptions from the VAT deduction prohibition apply only in the following cases:

• demonstrably for resale purposes
• demonstrably and predominantly for rental purposes
• demonstrably and predominantly for use in taxi services

For the above conditions, the requirement of “predominantly” means that the criteria for exemption from the restriction of the right to deduct — i.e., rental activity or taxi services — must be met at a rate of at least 90 percent on average over a reasonably determined period. This means that the vehicle may also be used for other business or non‑business purposes, but only up to a maximum extent of 10 percent. The unit of measurement for assessing compliance must be the indicator most characteristic of the activity — either time or mileage. The law does not specify what should be considered a “reasonably determined period”; this is left to the taxpayer’s discretion, although it is naturally advisable to apply a customary and realistic timeframe (e.g., year, month, etc.).

For the purposes of this article, however, the most relevant cases are those where the passenger car is used in the taxpayer’s own business activities, but not for the exceptional purposes listed above — in other words, vehicles used as so‑called company cars. As we can see, in such cases the business may not deduct the input VAT charged on the acquisition.

Rental

In the case of renting a passenger car, a particularly favourable rule has been in effect since 2019 to simplify administration. Under Section 124 (4) of the VAT Act, the lessee may apply a 50% VAT deduction, regardless of the proportion of private use. This means that even if private use reaches 99%, the 50% VAT deduction may still be applied. According to the published tax authority (NAV) guidelines, there is no minimum requirement for taxable use. It is sufficient to substantiate even a single business trip per month, and the company already meets the condition for applying the 50% deduction.

However, the business may choose to apply the general rules instead. Pursuant to Section 125/A of the VAT Act, if the taxable person does not wish to apply the prescribed 50% deduction ratio in the case of mixed‑purpose use of a rented passenger car, they may exercise the right to deduct VAT to the extent that the vehicle is used for, or contributes to, VAT‑entitled economic activities. Naturally, this must be supported by appropriate documentation.

These, then, are the VAT rules applicable to purchase and rental. In the following section, we will examine the considerations and options available when the use of the vehicle is structured through a leasing arrangement.

Leasing

In Hungary, there is no standalone act that exclusively regulates leasing. Leasing is governed by several pieces of legislation, but the two primary references are the Civil Code (Act V of 2013), which sets out the rules of lease agreements, and the Credit Institutions Act (Act CCXXXVII of 2013), which regulates the operating conditions of lessors. From an economic perspective, leasing combines elements of sale, rental, and credit, and therefore qualifies as an atypical contract.

Leasing in VAT

The VAT Act does not contain a definition of leasing. As a result, each structure must be assessed based on its actual substance and the true intention of the parties. From a VAT perspective, the main leasing structures can be categorised as follows:

1. Operating lease, which by its characteristics is treated as long‑term rental
2. Closed‑end financial lease granting unconditional ownership, which qualifies as a sale
3. Open‑end financial lease containing an option to acquire ownership, the VAT treatment of which may vary depending on the circumstances

Operating Lease

In the case of an operating lease, no transfer of ownership takes place. The asset remains the property of the lessor, is recognised in the lessor’s books, and depreciation is also accounted for by the lessor.

Based on these characteristics, the arrangement does not qualify as a sale but rather exhibits the features of long‑term rental, as the asset returns to the possession of the lessor at the end of the lease term (and ownership remains with the lessor throughout the entire period).

Since it qualifies as rental, the VAT charged on the lease payments may be deducted in accordance with the methods described in the introductory section. If the vehicle is used (also) for business purposes, the lessee may either apply the fixed 50% deduction rate or calculate the deductible proportion based on the actual business vs. non‑business use.

In our next article, we will continue the topic of leasing by examining the rules applicable to financial leases and the potential reclassification risks.

Tower Consulting, a Budapest‑based accounting and payroll company, together with its cooperating partners, is available to assist you with any accounting, payroll, or tax advisory matters in Budapest or anywhere in the country via remote, online channels.