Corporate Income Tax in 2025: Purchasing or Renting Less Environmentally Friendly Cars Will Cost More

Sustainability and Taxes—two words that can send shivers down the spine of some business leaders. However, in a move to encourage companies to adopt more sustainable practices, new amendments to the Law on Corporate Income Tax took an effect on January 1, 2025. These changes increased corporate income tax rate from 15% to 16% and altered the rules for attributing costs related to the purchase and rental of passenger cars to allowable deductions.

According to expert Rūta Švedarauskienė and senior associate Laura Navickė from the law firm Ellex Valiunas, the upcoming changes will widen the gap between financial and tax accounting, increasing the workload for accounting professionals and raising the tax burden for companies that purchase or rent less environmentally friendly cars starting from 2025.

Allowable Deductions for the Purchased Car Will Depend on CO2 Emissions

Until the end of 2024, businesses were able to deduct the full cost of purchasing or renting passenger vehicles. However, as of 1 January 2025, only a portion of the purchase price of a newly purchased car will be eligible for the deduction, depending on its carbon dioxide (CO2) emissions. The lower the emissions, the larger the deductible portion of the cost (or the entire cost, if it does not exceed a specified limit):

• If CO2 is equal to 0 g/km: allowable deduction is up to €75,000.
• If CO2 is between 0 g/km and 130 g/km CO2: allowable deduction is up to €50,000.
• If CO2 is between 130 g/km and 200 g/km CO2: allowable deduction is up to €25,000.
• If CO2 is above 200 g/km CO2: allowable deduction is up to €10,000.

Additionally, the State Tax Inspectorate clarifies that the non-deductible portion of the car’s purchase price shall be gradually allocated to non-deductible expenses over the car’s depreciation period, not all at once.

For instance, if a car emitting 50 g/km CO2 is purchased in January 2025 for €100,000, only €50,000 can be deducted over six years (€8,333 annually), while the remaining €50,000 shall be attributed  to non-deductible expenses proportionately over six years.

Sustainability Becomes Important Even When a Company Rents a Car

The changes will apply not only to the purchase but also to the rental expenses. Starting January 1, 2025, when a company rents a car under a new or extended agreement instead of purchasing it, only a portion of the rental expenses will be deductible each month. This deductible portion will depend on the previously mentioned CO2 emission limits and the depreciation rate applied by the lessee, divided by 12. 

For example, if a company rents a car emitting 150 g/km CO2 under a contract signed after January 1, 2025, and applies a six-year depreciation rate for passenger vehicles, the amount of allowable deductions per month will be €347 (€25,000 (maximum allowable deduction based on CO2 emissions) ÷ 6 years ÷ 12 months). If the monthly rental expenses exceed this amount, the difference shall be attributed to non-deductible expenses for corporate income tax purposes. 

As a result, companies looking to minimize non-deductible expenses and corporate income tax will need to choose passenger vehicles more carefully based on their environmental performance. 

It is important to note that these restrictions will not apply to light goods vehicles (classified as N1) or to vehicles used for rental services, driver training, or transportation services. Furthermore, the restrictions on rental costs will not apply to rental periods of less than 30 days or to agreements made through electronic platforms (e.g., “Bolt” or “CityBee”). 

Challenges in VAT Calculation for Car Purchases

The Law on Corporate Income Tax stipulates that only the portion of non-deductible VAT calculated on the basis of deductible expenses for corporate income tax purposes can be attributed to deductible expenses. Accordingly, if the deductible expense limits for cars are restricted, situations may arise where the VAT calculated on the car’s price cannot be fully allocated to deductible expenses. 

For example, if a car emitting 50 g/km CO2 is purchased for €100,000 plus €21,000 VAT, only the VAT calculated on €50,000 can be treated as allowable deductions, amounting to €10,500. The remaining VAT portion (€10,500) should be classified as a non-deductible expenses in the first year of the car’s purchase. 

Car Sales and Corporate Income Tax

The Law on Corporate Income Tax stipulates that the income from the increase in asset value is calculated as the difference between the asset’s sale price and its acquisition cost. If the asset is subject to depreciation, its acquisition cost is reduced by the amount included in allowable deductions. 

Although it might seem that a company selling a car would have the right to deduct the entire acquisition cost (minus the accumulated depreciation) from the revenue, the position of the State Tax Inspectorate has been that only that part of the purchase price which meets the threshold for allowable deductions will be treated as the purchase price. 

For example, if a company purchases a car with CO2 emissions of 50 g/km for EUR 100 000 and decides to sell it the following month for the same amount of EUR 100 000, it will be considered that the purchase price of the car for corporate tax purposes equals EUR 50 000 and that the profit on the sale equals EUR 50 000. 

Business will not always be happy

The change will oblige companies to differentiate the accounting for cars purchased/leased from 2025 onwards, including additional calculations. Accordingly, this will increase time costs and may encourage people to stick to older cars, while forgoing the purchase of newer and greener cars. When these changes to corporate income tax were introduced, it was announced that they would raise (only!) €8 million a year for the state budget. However, these calculations did not consider the additional accounting burden on companies, and it is not clear to what extent the new regulation will actually contribute to the Green Deal objectives.