Luxembourg VAT authorities clarify VAT treatment of company cars

Following the CJEU’s decision in QM v Finanzamt Saarbrücken (case C-288/19) and Circular N°807 dated 11 February 2021, the VAT authorities have clarified the VAT treatment applicable to company cars via new Circular N°807bis.

The newly published circular clarifies the VAT treatment set out in Circular N°807, which was published shortly after the CJEU’s decision (see our previous newsflash here_)

Notably, on the topic of “consideration”, the new circular clarifies that the supply of a vehicle by an employer is considered to be a taxable supply of services, even when employer and employee have agreed a specific car budget for the employee or they have merely agreed criteria that enable the cost to be determined.

The new circular also clarifies that the taxable amount for the leasing of a means of transport is the remuneration received by the lessor. However, for services supplied by an employer to its employees, VAT has to be calculated on the basis of the “normal value”/”open market value” of the service provided. In practice, this will be at least the amount of the rent or fees paid by the employer to the lessor, plus any other costs linked to the vehicle incurred by the employer. If the employer owns the vehicle, the taxable amount will be the depreciation of the vehicle over 5 years, plus any related costs.

If the vehicle is also used in a professional context, the “normal value” should be calculated on the basis of the private usage of the vehicle only. Additionally, no VAT deduction right will arise for professional use of the car if the work activities performed fall outside the scope of VAT or are exempt with no input VAT deduction right.

Previously, a specific set of rules applied to the private use of company assets. This often led to the employer paying VAT on car leasing to the Luxembourg VAT authorities, either by collecting VAT from its employees or by bearing the burden itself. However, the QM case and Circular N°807 specified that, in a cross-border scenario (employee residing in another Member State), the employer is obliged to properly assess, declare and pay the VAT in the employee’s country of residence.

On this topic, the new circular exceptionally allows Luxembourg taxpayers to retroactively amend their VAT returns in order to apply the correct VAT treatment. The correction can be made retroactively for up to five years, even if the VAT authorities have already validated the returns by issuing a VAT assessment. In addition to the corrections regarding the Luxembourg VAT reporting obligation, the taxpayer will also have to report correctly in the employee’s Member State of residence, mainly through the VAT One Stop Shop (OSS).

Even if the new circular does not address directly the employees concerned by a company car, it is clear that they could be held liable for VAT on their company car retroactively (in accordance with the regulations in force in their country of residence).

As a reminder, the provision to an employee of a company car, when also used for private purposes, is considered as a taxable benefit in kind and its valuation is made according to different methodologies depending on the situation (i.e. cost price per kilometer / lump-sum method / comparison between the salary sacrifice and the leasing market value).

In case the employee bears a fixed amount towards the leasing costs such participation can be deducted from the taxable benefit in kind, up to a limit of 20% of the cost borne by the employer.

The payment of VAT by the employee is however not tax deductible from the benefit in kind and must be recovered from the net salary. If the employer assumes the amount of VAT on behalf of the employee (also retroactively), the assumption is that it would constitute an additional taxable benefit for the employee.

Discussions are ongoing between the main actors to potentially review the benefit in kind calculation and factor the impacts of the last VAT developments on the Luxembourg car leasing market.

If your company provides company cars to employees, it is important to assess your current reporting obligations and monitor how the tax authorities of our neighbouring countries respond to this latest circular.