VAT treatment of cross-border company cars

On 20 January 2021, the Court of Justice of the European Union ("CJEU") released a decision in case C-288/19, concerning the VAT treatment of company cars provided by a Luxembourg established employer to its staff employees, residing in Germany.

In this decision, the CJEU had the opportunity to clarify the conditions under which the professional and private use by an employee of a company car put at his disposal by an employer is subject to VAT.

Following the CJUE’s decision, the Luxembourg VAT authorities (Administration de l’Enregistrement, des Domaines et de la TVA) issued a Circular n°807 (the “Circular”) on 11 February 2021 confirming the application of the ruling of the CJUE.

The VAT treatment of cross-border company cars resulting from the above CJUE decision and the Circular may (in certain circumstances) have negative consequences for Luxembourg established employers providing company cars to commuting employees.

Background

A Luxembourg established company (“Luxembourg Employer”) made two vehicles available to two employees residing in Germany, for professional and private use.

In one case, a vehicle was put at the employee's disposal free of charge and in the other case, the vehicle was provided to the other employee against a reduction of his salary.

From the Luxembourg Employer’s perspective:

• there was no supply of service for consideration in the first case;
• the second case could be regarded as a supply of services for partial consideration. However, there was no hiring of means of transport for the purposes of Article 56(2) of Directive 2006/112. In these circumstances, it considered that the place of supply was located in Luxembourg.

However, the German tax office considered that the Luxembourg Employer performed a “long-term rental of means of transport”, located and subject to VAT in Germany.

The German Court which dealt with the Luxembourg Employer’s complaint, decided to refer the matter to the CJEU for a preliminary ruling.

Findings

According to the CJUE:

• the provision of a company car to an employee for consideration (even in the form of a reduction of salary) qualifies as a “supply of long-term hiring of means of transport” where (i) the employee has been conferred a permanent right to use the vehicle for private purposes and to exclude other persons from using it, (ii) in exchange for rent and (iii) for an agreed period of more than 30 days;
• by contrast, the act of making a company car available to an employee free of charge falls outside of the scope of VAT.

The place of a “supply of long-term hiring of means of transport” to a non-taxable person shall be the place where the customer is established, has his permanent address or usually resides. Consequently, Luxembourg employers providing company cars to German employees must declare and pay German VAT in this scenario.

With the above CJUE decision, the Luxembourg VAT authorities issued the Circular confirming and clarifying the following:

• Where the car is put at the disposal of the employee who has the right to use the car for non-business purposes and to exclude other persons from using it, for an agreed period of more than 30 days in exchange for rent, the place of the service is deemed to be the place where the employee has his permanent address or usually resides. Consequently, Luxembourg employers are subject to potential VAT obligations in countries where their cross-border employees live (Belgium, France and Germany). The taxable basis in this case is the rent paid to the employer.
• Where the car is made available to the employee free of charge and the employer was able to deduct (wholly or partly) the input VAT on the acquisition of the car (or the VAT paid on the car leasing), the latter must declare and pay VAT in Luxembourg. The taxable basis is the percentage of use for non-business purposes applied to the amount of expenses incurred for this car and for which the taxable person was able to deduct, wholly or partly, the input VAT.
• Where the car is made available to the employee free of charge and the employer was not able to deduct (wholly or partly) the input VAT on the acquisition of the car (or the VAT paid on the car leasing), the transaction falls outside the scope of VAT rules.

Further to the CJUE decision and the Circular, it will be critical that Luxembourg and the cross-border countries agree on the same VAT position so as to avoid any risk of double taxation as well as on the date from which this VAT treatment should apply.