The ECJ’s decision (C-288/19) on the provision of vehicles by employers to employees residing abroad
On 20 January 2021, the European Court of Justice (“ECJ”) ruled on the place of taxation of the provision of company vehicles to employees residing in a Member State other than that of their employer. ruled on the place of taxation of the provision of company vehicles to employees residing in a Member State other than that of their employer.
In the case at hand, a Luxembourg fund management company (the “Company”) made company vehicles available to two German resident employees.
These vehicles were used both for professional and private purposes. The cars were made available under different situations: (i) one vehicle was made available free of charge, while (ii) the other was made available in consideration for an annual contribution by the employee deducted from the employee's remuneration.
The Company was registered for VAT in Luxembourg, but did not benefit from any right of deduction (in application of the VAT simplified regime). In November 2014, the Company also applied to be registered for VAT in Germany, and subsequently filed German VAT returns. These statements were accepted by the authorities, but the Company filed a claim against the tax assessments. Following the rejection of this claim by the administration, the Company filed an appeal with the Land Finance Court of Sarre, which submitted to the ECJ the question of whether the VAT Directive’s concept of “hiring of a means of transport to a non-taxable person” should also cover the provision of a company car that forms part of a taxable person’s business assets to their staff. The outcome of this dispute hangs on the interpretation of Article 56 (2) of the VAT Directive (i.e., Article 17.2.7°. b) of the Luxembourg VAT law).
The ECJ distinguished both situations and took a different approach depending on whether the employee was in one or the other situation:
(i) Vehicle made available free of charge
The provision of a vehicle to an employee free of charge is not subject to VAT when the employer did not deduct the input VAT it had paid on the vehicle. On the contrary, if input VAT has been deducted on the vehicle, then the employer must recognize and apply VAT on the private use of the vehicle on basis of Article 26 of the VAT Directive. In such a case, VAT is applicable in the country of residence of the employer.
(ii) Vehicle made available in consideration of a contribution
Further, the ECJ considered in particular that when the employee pays a consideration for the use of a company vehicle, the transaction is to be considered as a normal supply of services, taking the form of a hiring of means of transport. Therefore, the provision of a company vehicle might be taxable for VAT at the place of residence of the employee (in this case in Germany), under the following conditions:
- the provision of the vehicle must constitute a provision of services for consideration within the meaning of the VAT Directive, which is the case in particular when the employee devotes part of his remuneration to it in return;
- the employee must always have the right to use the company vehicle for private purposes and with the prerogative to exclude other people from it;
- the company vehicle must be made available to the employee for a period exceeding 30 days.
The Court also clarified that the fact that the Luxembourg company does not own the vehicle, but that it was able to hire it out because it had it under a leasing contract, does not preclude the application of Article 56 of the Directive.
The Luxembourg angle - Circular 807 of the Luxembourg VAT authorities
In reaction to the ECJ’s decision, the Luxembourg VAT authorities issued Circular 807 (“the Circular”), which merely summarises the content of the ECJ’s decision but does not provide additional guidance. It informs Luxembourg employers that they may have VAT obligations in countries where their employees reside that could lead to paying VAT abroad. The potential impact, if any, to cars provided to Luxembourg residents is not treated either.
It is to be expected that neighbouring countries will be relying on the ECJ's decision to review in detail the situation of Luxembourg companies employing non-resident employees, with a view to ascertaining whether reporting and VAT collection obligations could arise.
At this stage it is still difficult to quantify the impact of this decision, as on the one hand, additional VAT compliance obligations and costs could arise for the employers, while on the other hand new VAT deduction possibilities could arise, so that a case-by-case analysis of the taxpayers position should take place. It might also be worthwhile to review existing working contracts and car leasing agreements.