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How is the annual 1% limit applied when crediting VAT?
Under Article 175.3 of the Tax Code, VAT paid on housing expenses related to employees may be credited subject to certain conditions. According to the rules approved by Cabinet of Ministers Resolution No. 492 dated November 22, 2024, 50% of housing expenses related to employees may be deducted for tax purposes, provided that the amount does not exceed 1% of the annual income earned during the tax year.
The key issue is that the taxpayer’s final annual income has not yet been determined during the year, meaning that the 1% limit cannot be calculated precisely in advance. Therefore, VAT on the relevant expenses may be credited during the year, but a final calculation must be made at the end of the year.
For example, if a company incurs expenses for renting residential premises for its employees and the landlord is a VAT taxpayer, the VAT related to these expenses may be credited provided that the relevant electronic invoice and payment requirements are met. However, at the end of the year, the company’s actual annual income is determined and it is calculated whether 50% of the housing expenses exceeds 1% of that income.
If, based on the year-end results, the deductible portion of housing expenses exceeds the established 1% limit, the VAT corresponding to the excess portion cannot be credited. The State Tax Service has also stated that VAT relating to amounts exceeding the established limit is not eligible for credit.
In such a case, the taxpayer must adjust the VAT previously credited. If an excess over the limit is identified at the end of the year, an amended VAT return must be submitted for the relevant tax period or periods, the excess VAT credit must be corrected, and the resulting tax liability must be paid to the state budget together with the applicable interest.
In other words, the 1% limit is not calculated separately each month for the final determination of the credit. VAT may be credited during the year if the relevant legal requirements are met. However, at the end of the year, the final limit is calculated based on the actual annual income and housing expenses. If it is determined that part of the VAT previously credited relates to expenses exceeding the established limit, the relevant amount must subsequently be adjusted.
Legal basis: Articles 109.3, 119.2 and 175 of the Tax Code, as well as Cabinet of Ministers Resolution No. 492 dated November 22, 2024.
Under Article 175.3 of the Tax Code, VAT paid on housing expenses related to employees may be credited subject to certain conditions. According to the rules approved by Cabinet of Ministers Resolution No. 492 dated November 22, 2024, 50% of housing expenses related to employees may be deducted for tax purposes, provided that the amount does not exceed 1% of the annual income earned during the tax year.
The key issue is that the taxpayer’s final annual income has not yet been determined during the year, meaning that the 1% limit cannot be calculated precisely in advance. Therefore, VAT on the relevant expenses may be credited during the year, but a final calculation must be made at the end of the year.
For example, if a company incurs expenses for renting residential premises for its employees and the landlord is a VAT taxpayer, the VAT related to these expenses may be credited provided that the relevant electronic invoice and payment requirements are met. However, at the end of the year, the company’s actual annual income is determined and it is calculated whether 50% of the housing expenses exceeds 1% of that income.
If, based on the year-end results, the deductible portion of housing expenses exceeds the established 1% limit, the VAT corresponding to the excess portion cannot be credited. The State Tax Service has also stated that VAT relating to amounts exceeding the established limit is not eligible for credit.
In such a case, the taxpayer must adjust the VAT previously credited. If an excess over the limit is identified at the end of the year, an amended VAT return must be submitted for the relevant tax period or periods, the excess VAT credit must be corrected, and the resulting tax liability must be paid to the state budget together with the applicable interest.
In other words, the 1% limit is not calculated separately each month for the final determination of the credit. VAT may be credited during the year if the relevant legal requirements are met. However, at the end of the year, the final limit is calculated based on the actual annual income and housing expenses. If it is determined that part of the VAT previously credited relates to expenses exceeding the established limit, the relevant amount must subsequently be adjusted.
Legal basis: Articles 109.3, 119.2 and 175 of the Tax Code, as well as Cabinet of Ministers Resolution No. 492 dated November 22, 2024.