Company Cars – Overview of the situation in Luxembourg and its neighbouring countries

The VAT (Value Added Tax) treatment applied to company cars is a complex topic and specific administrative guidance has been released in Luxembourg and some of its neighbouring countries in that respect.

Following the EU (European Union) judgment in the case QM (C-288/19) back in January 2021, some tax authorities started reviewing their practice on the topic of VAT and company cars that  are partly used  for private purposes.

The immediate consequence of this decision is that companies might be required to pay VAT in other countries and therefore need to review their Luxembourg position.

Below we summarised the applicable cases to enable companies to see in which country they might be required to charge local VAT.

A similar approach is taken in Belgium whereas the recent Belgian circular (i.e. n°2023/C/72) is more detailed.

The circular provides details on the method to compute the taxable basis on which Belgian VAT would be applicable and distinguishes two situations:

• If the company car is leased by the employer:

(Rent excluding VAT + Expenses excluding VAT) x (% deduction - % Professional) 

• If the company car has been purchased by the employer:

((Purchase price excluding VAT / 5) + Expenses excl. VAT) x (% deduction - % Professional).

In the above computation methods:

• the "% deduction" is the input VAT recovery right applicable in the country of establishment of the company in relation to leasing costs. Note that in Luxembourg the "% deduction" is always 100% as Luxembourg does not automatically restrict the input VAT deduction on leasing and fuel costs (N.B. other countries do).
• the "% Professional" represents the portion of professional use of the car by the employee. Note that a lump-sum method is proposed by the Belgian VAT authorities where the % Professional is equal to 35%. By using the lump-sum method, the portion of private use of the company car is by default equal to 65%.
• If the employer is not allowed to fully recover VAT (and uses a deduction “prorata” in Luxembourg), this recoverable fraction will be added to the equation to decrease the amount of VAT due (i.e. the deduction ratio is therefore different from the "% deduction").

(Rent excluding VAT + Expenses excluding VAT) x (% deduction - % Professional) x deduction ratio (%)

Applying the above principles, the computation will be impacted depending on the input VAT recovery right a company as below: 

• for a Luxembourg company having a full input VAT recovery right the taxable basis would be: (Rent excluding VAT + Expenses excluding VAT) x 65% x 100%
• for a Luxembourg company having a partial input VAT recovery right of 50% the taxable basis would be: (Rent excluding VAT + Expenses excluding VAT) x 65% x 50%

The Belgian VAT authorities indicate that Belgian VAT is due as from 1 July, 2021. Any regularisation actions can be taken either via direct VAT registrations or through a single registration under the "One-Stop-Shop" scheme.

The One-Stop-Shop (OSS) is an optional regime which allows companies to collect and pay the VAT applicable in Member States where they are not established. This regime can be used to declare and remit to the neighbouring VAT authorities the VAT due on the hiring of company cars by employees residing outside of Luxembourg. This can only be used when the company is not already registered for VAT purposes in the neighbouring Member States. This regime simplifies the collect of the VAT and the payment, as the company only has one return per quarter to file and one payment to make (rather than dealing with the VAT compliance specificity and filing frequency of each country).

The Belgian VAT authorities accept, as a simplification measure, that the taxable basis for past exercises would be considered as being inclusive of Belgian VAT. This means that the computation method to be used for past exercises for a company that can fully recover input VAT would be: 

(((Rent excluding VAT + Expenses excluding VAT) x 65 %) / 1,21) x 21 %.

The French authorities have not yet taken a position although their local provisions would allow them to apply the decision retroactively. Some companies and advisors have however reached out to them and we expect some first guidance soon. As far as France is concerned, one should monitor the situation as long as no official position is taken by the authorities. However, if employers want to adopt a prudent approach, they may also consider approaching spontaneously the authorities and do a voluntary disclosure.