Can “Mild Hybrid” (MHEV) cars benefit from a reduced excise duty rate in Poland?

In recent years, Poland has introduced several initiatives to promote environmentally friendly vehicles, including hybrid and electric vehicles. However, the correct classification of a vehicle is crucial to determine whether it qualifies as a hybrid (MHEV, FHEV or PHEV), as this directly affects the applicable excise rate.

There are currently numerous disputes with tax authorities regarding the excise on MHEVs, but a recent court ruling has provided an important interpretation in favour of taxpayers.

The dispute over the interpretation of the excise rules

In the case in question, Company M, which specialises in the purchase of MHEV passenger cars, asked the Director of the National Tax Information Office (KIS) whether the reduced excise rate could be applied to MHEV vehicles. The Company argued that the hybrid system used in MHEVs should be considered as an internal combustion-electric engine according to Art. 105(1a) and (1b) of the Excise Act. Therefore, according to the Company, it should be entitled to a reduced excise rate of 9.3% or 1.55%, depending on the engine capacity.

Decision of the Director

The Director disagreed with the Company’s interpretation. According to the tax authority, MHEV vehicles do not meet the criteria to be classified as combustion-electric vehicles under the provisions of the Excise Act. The authority argued that the electric motor in these vehicles is not capable of independently powering the car or ensuring smooth starting, which the tax authority considers to be a key requirement for the reduced excise rate. The Director emphasised that the intention of the regulation was to support vehicles with significantly lower emissions, which are capable of operating solely on electric power and ensuring smooth starting.

Decision of the Regional Administrative Court (WSA) in Warsaw

The case was brought before the Regional Administrative Court (WSA) in Warsaw, which overturned the Director’s interpretation, stating that the tax authority had misinterpreted the regulations. The court ruled that the tax regulations do not require the electric motor in a hybrid system to enable “smooth starting” or to power the vehicle independently on electric power alone. The WSA found that the key factor is the cooperation between the combustion engine and the electric motor, which qualifies the vehicle for the reduced rate of excise.

Conclusions

The dispute over the reduced excise rate for MHEVs highlights significant differences in the interpretation of tax rules between taxpayers and tax authorities. Taxpayers investing in innovative automotive solutions have a legitimate expectation that preferential excise rates should apply to hybrid vehicles, including MHEVs, that contribute to emission reductions.

The issue of taxation of MHEVs remains open as the Court’s ruling, which is not yet final, may introduce a new approach to the interpretation of excise rules. Businesses involved in intra-Community acquisitions or imports of MHEVs should closely monitor the development of this case and others pending before the administrative courts, as a consistent line of decisions may lead to the possibility of claiming excise refunds if it was paid at the standard rate, or to tax liabilities if excise was paid at the reduced rate instead of the standard rate. In addition, companies planning to make intra-Community acquisitions or imports of MHEVs should consider making their own request for interpretation of the relevant excise provisions, taking into account the possibility of a legal dispute, which could, however, open the way for the application of the reduced excise rate.

WSA judgment of 14 August 2024, ref. III SA/Wa 1147/24 – the decision is not yet final.