OUR INSIGHTS AT A GLANCE

  • In its QM case, the CJEU ruled that the provision of a company car by an employer to an employee against remuneration should be considered as the hiring of a means of transport and be subject to VAT in the country where the employee resides.
  • Further to this case, the Luxembourg VAT authorities issued a new circular mainly to give details on the determination of the taxable basis that should be subject to VAT when employers provide company cars to their employees.
  • Hereafter, we detail the content and the potential impact of this circular.

Background

  • The CJEU case C-288/19

In its QM v. Finanzamt Saarbrücken case (C-288/19), the Court of Justice of the European Union ("CJEU") ruled that the provision of a company car by an employer to an employee against a remuneration should (i) be considered as the hiring of a means of transport and (ii) be subject to VAT in the country where the employee resides.

In particular, the CJEU stated that the provision of a car by an employer qualifies as the long-term hiring of a means of transport when:

  1. the provision of the car is made against a rent (i.e. in the form of a payment from the employee to the employer, the retention of a part of the employee's salary or the renunciation by the employee of other benefits),
  2. the car remains at the disposal of the employee who can use it for private purposes, and
  3. the employee has the right to use the car for a period exceeding 30 days.

On the contrary, when the provision of the car does not involve a payment from the employee, a salary retention nor the renunciation of some benefits, such car provision is not to be seen as made against remuneration and therefore should not be considered as a VAT taxable supply of a means of transport.

  • Circular n° 807

Further to the QM case, the Luxembourg VAT authorities issued circular n°807 on 11 February 2021, mainly reiterating the principles that emerge from the case law. Three different scenarios were identified:

  • When a company car is exclusively put at the disposal of an employee against a remuneration (as defined by the CJEU) for a period exceeding 30 days, the employer should be considered as supplying a means of transport for a long term and the place of supply of such service is the country where the employee resides. If this country is Luxembourg, the employer has to charge Luxembourg VAT on the leases. If the employee resides in another EU member State, this would likely trigger a VAT registration obligation for the employer in that country in order to comply with local VAT obligations1 . The Luxembourg VAT authorities added that the taxable basis of such supply corresponds to the rent paid to the employer;
  • When a company car is not put at the disposal of an employee against a remuneration, but the employer (partially) deducts the input VAT incurred on the acquisition/leasing of the car, the employer should declare the portion of the use of the car made for private purposes as a private use of company assets (i.e. use for purposes other than those of its business) in its VAT returns. In such case, the taxable basis corresponds to the percentage of private use of the car applied to the amount of expenses related to the car which the employer was in a position to (partially) deduct input VAT for;
  • When there is no consideration paid by the employee and when the employer did not deduct any input VAT with respect to the acquisition/leasing of the car, the supply to the employee should fall outside the scope of VAT.

It is important to note that following that circular, important uncertainties remain, notably as to whether the Luxembourg VAT authorities or foreign VAT administrations would require adjustments to be made for the past.

Circular n° 807 bis

On 28 April 2023, the Luxembourg VAT authorities issued a second circular intending to clarify the application of the first circular published in 2021.

The new circular provides details on the determination of the taxable basis that should be subject to VAT. By referring to the concept of "open market value" between unrelated parties, the circular states that the taxable basis of the rents should correspond to at least its "normal" economic value (i.e. the costs incurred by the employer to provide the car to the employee).

In a scenario where the company car is leased by the employer from a leasing company, the taxable basis of the rent to the employee should correspond to at least the rent paid to the leasing company by the employer, together with any additional expenses incurred by the employer in order to put the car at the disposal of its employee.

In the scenario where the employer has acquired the car, the normal value of the supply cannot be less than the depreciation value of the car computed over a period of five years, together with any additional expenses incurred by the employer (maintenance, repairs, etc.).

In case the company car is also used for business purposes, the circular clarifies that the normal value of the supply to the employee should be reduced in due proportion to the business use, meaning that the taxable basis should only reflect the private use of the car.

As well as the clarifications on the taxable basis of the rents, the circular addressed the potential regularisations to be made for the past. In that respect, the circular specifies that when a Luxembourg employer is required to charge VAT retroactively on the rents, notably in another jurisdiction, a corresponding adjustment could be undertaken in Luxembourg for the years not covered by the period of limitation (five years).

Conclusions

Companies providing company cars to Luxembourg and/or non-Luxembourg resident employees should carefully review on a case-by-case basis the leasing contracts concluded in order to determine whether VAT has to be charged on the rents and if regularisations are required in Luxembourg and in the neighbouring countries.

We would be happy to help you have a clearer view on this matter and to assess the impact of this CJEU decision and circulars on your business.

Footnote

1. Or the registration and the payment of the VAT through the VAT One Stop Shop (OSS).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.