1. Reasoning of the Court in the Case 288/19 of January 20, 2021
In this case, the German Saarland Finance referred to the Court of Justice for a preliminary ruling to decide whether the provision of a company car to an employee qualifies as a “hiring of a mean of transport to a non taxable person” when he does not make a payment, nor use any of his cash consideration for it nor choose between various benefits offered by its employer.
The Court ruled that while the provision of a company car for free could not constitute a supply of services for consideration within the meaning of the VAT Directive1, it wasn’t the case when there was a legal relationship between the parties pursuant to which there is a reciprocal performance, the remuneration received by the provider being the value given in return of such supply.
The consideration can be a payment made by the employee or a retainer by the employer of a portion of the employee’s remuneration or even the use of a company car according to an agreement between the parties where such choice prevents the employee from benefiting of other advantages. The benefit in kind reported for income tax purposes does not count as a consideration.
2. The Circular n° 807 of February 11, 2021
The main consequence of such interpretation by the Court is that VAT must now be applied when companies make cars available to their staff against a payment.
The practical impact of this case is summarized in the circular n°807:
- When a car is exclusively made available to an employee against a consideration in one or the other way described above for over 30 consecutive days, the employer, as a taxable person, supplies a long term car rental service which is deemed to be supplied where the employee, as customer, is established, has his permanent address or usually resides. Luxembourg VAT at the rate of 17% will have to be charged. If the employee resides in another Member State than Luxembourg, the taxable person must register there in order to comply with its VAT obligations. VAT must be charged on the taxable basis which consist in the rents received;
- If the car is not made available against a consideration, the input VAT deduction must be regularized by the employer who entirely or at least partially deducted the input VAT on the purchase of the vehicle or on the lease rents. A private use of a business asset must be reported in the return, the taxable basis being the percentage of the non business use applied on the total amount of the costs incurred in relation to the vehicle and for which VAT was deducted;
- Where the car is made available for free and that the taxable person did not deduct any VAT at the time of the purchase or on the lease rents, the supply falls outside the scope of VAT.
It remains uncertain whether the VAT authorities, in Luxembourg or in the neighbouring jurisdictions will challenge the situation for the past but any company that currently makes cars available to its employees should now carefully review its fleet agreements and the potential VAT obligations they may trigger.
Our tax team is available to assist you for any assistance you may need in this respect.
Ngoc-My Nguyen - Senior Associate (email@example.com)