Car Depreciation Limits from 2025: New Tax Rules & VAT Impact Explained

The article examines the new amendments to the Corporate Income Tax Law, which, once they come into force, will impose restrictions on the depreciation of cars from 2025, focusing on the practical calculations and the relationship with VAT.

Limiting car depreciation from 2025

For a long time, depreciation of passenger cars used in the economic activities of an enterprise has been calculated in the normal way as provided for in the Corporation Tax Law (the "CIT Law").

However, new restrictions in the ITA come into force on 1 January 2025. Deductions for the purchase and lease costs of cars will be limited depending on how much CO2 the car emits.

The gist of the restrictions is that a portion of the purchase price of a passenger car, which is treated as an asset of the company, can be deducted from the company's income in accordance with the procedure set out in Article 18 of the ITA (depreciation costs of fixed assets).

The restrictions will be applied in four steps, depending on the pollution level of the car.

• When the car is clean and has CO2 emissions of 0 g/km, a maximum of €75,000 of the cost of the car can be deducted from income.

• If the car's CO2 emissions exceed 0 g/km but do not exceed 130 g/km, a deduction of up to €50,000 will be allowed.

• Where CO2 emissions exceed 130 g/km but do not exceed 200 g/km, a maximum of €25,000 can be deducted from income.

• Finally, if the car is polluting and has carbon dioxide emissions of more than 200 g/km, a deduction of up to €10,000 of the purchase price of the car can be taken from income.

So, in the following article, we will look at the specific provisions of the TCJA - what is most important for all companies in Lithuania to know about them.

Frequently asked questions and practical examples

Let's look at the practical calculations.

For example, a company buys a car this year for €65,000 excluding VAT. Let's say the car has CO2 emissions of 135 g/km. Therefore, a maximum deduction of €25,000 will be allowed for the cost of purchasing such a car. Consequently, the remaining part of the purchase price of the car, i.e. EUR 40,000 (EUR 65,000 - EUR 25,000), will be excluded as a deduction. In this case, the new restrictions would result in a loss of corporation tax savings of just over €6,000 compared to previous periods when there were no such restrictions.

Or, suppose a company buys two cars at a cost of €50,000 each, excluding VAT. One of the cars falls into the first group above, which is subject to a limit of EUR 75 000, because the purchase is of a passenger car with a carbon dioxide (CO2) emission of 0 g/km. In this case, the full amount will be deductible as before.

Meanwhile, the second car falls into the fourth group, which is subject to a limit of €10,000 for the purchase of a passenger car with carbon dioxide (CO2) emissions above 200 g/km. In this case, such a car will only be able to deduct €10,000 in the relevant number of years under the first appendix of the ITA. The remaining €40,000 would be attributable to disallowable deductions.

Let's take a closer look at the calculations. For example, a company will purchase a new electric car on 31/12/2025 and put it into service with a residual value of €1. Depreciation on the car using the straight-line method starts on 1.1.2026. Suppose the purchase price of an electric car is EUR 100 000. Assume that this electric car is classified in the first group above, with a carbon dioxide (CO2) emission of 0 g/km. Then, for corporation tax purposes, a total amount of €75,000 over 6 years can be attributed to allowable deductions within the limits. This means that the amount of depreciation attributable to allowable deductions in the following years (2026, 2027, 2028, 2029, 2030 and 2031) will be €12,500 each.

Of course, it is important to keep in mind that where the company is a legal person with limited liability (e.g. However, when filing the corporate income tax return PLN204, which is filed by way of adjustment, it will have to classify a part of the depreciation of the purchased electric car as a non-allowable deduction (PLN204S code 03 "Depreciation (or amortisation) of fixed assets in accordance with Art. 18 and Art. 19 of the Tax Act").

And what uncertainties arise in practice?

For example, Article 24(2) of the VAT Act provides that only amounts of input and import VAT on goods/services that are not deductible under the VAT Act and that are calculated on the basis of the deductions allowed (including the limited amounts) under the VAT Act may be deducted from income. Amounts of purchase and import VAT calculated on the basis of the non-allowable deductions set out in Article 31 of the VAT Act shall not be deducted from income for the purpose of calculating taxable profit. What do I need to know in practice when calculating depreciation in this case?

Let's illustrate with an example. Suppose a company purchases a passenger car in January 2025 for EUR 108 900 and puts it into service in the same month. The cost of the car excluding VAT is EUR 90 000 and the amount of input VAT is EUR 18 900. In accordance with Article 62 of the VAT Law, no VAT is deductible on the purchase of this car. The car has CO2 emissions of 127 g/km and, therefore, according to the emission group set out in Article 30-2(1) of the VAT Act, no more than EUR 50 000 of the purchase cost of the car can be deducted from income (CO2 emissions of 1-130 g/km).

In such a case, the tax administration is also justified in its comments in explaining that, given the EUR 50 000 limitation on the purchase price of such a car, for corporate income tax purposes the income of the entity can only be reduced by the EUR 50 000 part of the purchase price of the car, which, in accordance with the procedure set out in Article 18 of the ITA, is attributed to the limited deductions in instalments over the depreciation period of the asset. Accordingly, the amount of input VAT calculated on this part of the purchase price of the car, i.e. EUR 10 500 (EUR 50 000 x 21 %), is included as a limited allowable deduction in the calculation of the taxable profit for the tax period 2025.

It should be noted here that the remaining part of the purchase price of the car, €40,000 (€90,000 - €50,000), is subject to input VAT, i.e. €8,400 (€40,000 x 21%), calculated in 2025. The taxable profit for the tax period shall be classified as a non-allowable deduction and shall be declared in Annex S 'Amounts of expenses treated as non-allowable deductions' of the annual corporate income tax return form PLN204 for the tax period 2025, under code 8 'Amounts of tax pursuant to Article 24 of the ITA'.

These additional limitations on the deductibility of the purchase price and lease costs of cars therefore apply to cars purchased or leased from 1 January 2025 onwards for the purpose of calculating and declaring corporation tax for the tax period 2025 and subsequent tax periods. Finally, it should therefore be noted that, for example, where a company providing car rental services has entered into long-term rental contracts with its customers which will be renewed after 1 January 2025, i.e. the rental services will be provided on the basis of the transactions renewed after 1 January 2025, then in this case, the lessees of the cars (the legal persons) will be subject to an additional limitation on the deduction of the rental costs of the cars leased for the purposes of calculating the taxable profit for the taxable year 2025 and subsequent taxable periods.

If long-term lease contracts entered into before 1 January 2025 continue without renewal, the deduction limitations will not apply to car lessees.

One of the most common questions in practice is about rent - how does the restriction apply to rent? The monthly rental cost of a passenger car that is not considered to be an asset of the enterprise is deductible from income up to the above limit and the ratio of the depreciation rate (in years) set out in Appendix 1 of the ITA to the fixed asset class to which the rental car would be classified if it were considered to be an asset of the enterprise, divided by 12. However, these rules do not apply to leases with a total period of less than 30 days in a tax period, nor to leases made by means of an electronic interface such as a platform, portal or other similar instrument.

Another question is when does the restriction not apply at all? The limitation on the purchase and rental of cars in the ITA does not apply when the cars are used solely for rental activities, driving training services or transport services such as lifts, taxis, etc.

Depreciation limitation and VAT on cars

Under Article 62 of the VAT Law, VAT on cars is not deductible. In contrast, depreciation costs for passenger cars purchased from 2025 onwards are calculated in accordance with the limitations set out in Article 30-2(1) of the VAT Law, i.e. a part of the depreciation costs will be a disallowable deduction. Accountants may therefore wonder in which period should these amounts of VAT calculated on the non-allowable deductions be attributed to non-allowable deductions? Thus, the amount of VAT on the purchase or import of a passenger car which is not deductible under the VAT Law may be deducted from income only on the purchase price of the car (or part of it), up to the limits on the purchase price of the car in relation to CO2 emissions set out in Art. 30-2(1) of the VAT Act. The amount of VAT shall be deducted from income in the tax period in which the cost of the car is incurred. The amount of input VAT calculated on the part of the purchase price of the passenger car in excess of the limit set out in Article 30-2(1) of the VAT Act shall not be deducted from income for the purposes of calculating taxable profit.