VAT on company cars used by Luxembourg employees residing in Germany

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VAT on company cars used by Luxembourg employees residing in Germany: question referred to the Court of Justice of the European Union.

June 2019

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Many employees working for Luxembourg employers are entitled to a company car as part of their remuneration. This implies a fringe benefit subject to Luxembourg income tax and social security contributions and VAT. However, in 2014, the German VAT authorities issued a circular claiming that the German VAT is due on this private use by German residents. To seek clarification on these divergent interpretations, a German jurisdiction has recently referred the question to the Court of Justice of the European Union.

VAT is a tax based on a European Directive and Member States should thus apply it in a harmonized manner. However, Member States may have different interpretations in some specific situations.

Such a case is currently seen between Germany and Luxembourg regarding the VAT treatment of company cars put at disposal by Luxembourg employers to their employees residing in Germany. Luxembourg considers that the private use of the car is a ‘deemed supply’ located in Luxembourg and subject to Luxembourg VAT (except if the employer has not deducted the VAT incurred on car costs). However, Germany considers that the employer performs a long-term rental of means of transport, located and subject to VAT in Germany.

In order to clarify this situation, a German jurisdiction has referred the case to the Court of Justice of the European Union. The Court will have to decide whether the concept of the rental of means of transport also covers the assignment of a company car to employees. Should it be the case, the Member State of residence of the employee would be entitled to claim the VAT pursuant its own rules.

It is worth mentioning that during a meeting of the EU VAT Committee on 20 October 2014, the representatives of the 28 EU Member States were unable to take a common position and settle the divergence of interpretation between Germany and Luxembourg. Luxembourg is thus not isolated and without argument.

It is important to recall that a decision of the Court of Justice binds all EU Member States. Consequently, should the Court welcome the German interpretation, this would affect not only situations where company cars are used by employees residing in Germany, but also in other EU Member States. For example, Belgium and France will also be entitled to claim the payment of the local VAT.

It would be surprising to expect a decision from the Court before the second semester of next year at the earliest. In the meantime, concerned employers should carefully consider their situation and take any relevant action.

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