European Court of Justice rules on the cross-border provision of company cars
On 20 January 2021 the European Court of Justice (CJEU) handed down its conclusions (Case C-288/19) related to a case pending in front of the Saarland Fiscal Court. The CJEU ruled on whether German VAT can be applied on the provision
s of a company car by a foreign (here Luxembourgian) entrepreneur to a German domiciled employee. The decision turned on whether the provision of the car constituted a long-term rental of a means of transport to an end consumer within the meaning of the place of taxable transaction provision of Art. 56 (2) of Directive 2006/112/EC.
Article 56(2) of the VAT Directive states that the place of taxation of the rental of a means of transport to a non-entrepreneur (such as an employee) for an uninterrupted period of more than 30 days is where the non-entrepreneur (in this case, the employee) is established, has his or her permanent address, or usually resides.
Entrepreneur QM, a Luxembourg-based management company of an investment fund, provided two of its employees with company cars. The employees were domiciled in Germany and carried out their employment from Luxembourg. The vehicles were used by the employees both for business and private purposes. One of the employees was provided with the vehicle free of charge, while QM withheld an annual amount of just under EUR 5,700.00 from the other employee's salary for the use of the vehicle.
QM was subject to a simplified taxation procedure in Luxembourg due to its VAT-exempt fund management activities and could not deduct the VAT paid in connection with the two vehicles as input tax in this Member State. The vehicle provision did not trigger VAT in Luxembourg.
The competent German tax office for QM subjected both vehicles to German VAT by applying the place of taxable transaction provision of Art. 56 (2) of the VAT Directive. The German tax office said provision of a car to an employee is subject to German VAT because the German tax administration takes the view that any provision of a company car (for private use) triggers some kind of employee compensation, no matter what kind. In cases where the company car is provided free of charge, part of the employee’s work is considered as the compensation for the provision of the car (for private use), according to the German tax administration.
Ruling of the CJEU
On the applicability of the place of taxable transaction requirement of Art. 56 (2) of the Directive, the CJEU concluded the following:
- In the case where a company car is provided to an employee for a charge, a rental of a means of transport within the meaning of the place of taxable transaction provision exists only if the employer provides the car to its employee in exchange for the employee’s paying a leasing/rental fee for an agreed period of time, and only if the employee has exclusive right to the company car.
- The agreement to provide the car to the employee does not have to be made via a separate rental agreement; it can be included in the employee's employment contract and linked to the term of employment. A contractual requirement that entitles the employer to use the vehicle for business trips is irrelevant. What is crucial is that there is a ‘real agreement’ between the employer and its employee and that it guarantees the employee use of the vehicle for a defined period of time. Under the agreement the employee must have the contractual right to sole, exclusive use of the vehicle to the exclusion of others. As well, the work of the employee (or part thereof) cannot be considered as the rental payment required. The employee must pay (directly or through a payroll deduction) an amount representing the rental fee.
- In the case where the company car is provided to the employee free of charge, the place of taxable transaction provision cannot be applied.
In its reasoning, the CJEU also said that, in general, the provision of a company car to an employee (for private use) takes place without consideration for the private use if the employee does not make a payment and does not waive part of his or her salary, and does not waive a benefit offered by the employer.
Consequences of the ruling
The CJEU's ruling has, in particular, the following practical consequences, in cases where a company car is provided for longer-term private use:
- If an entrepreneur provides a company car free of charge from its registered office to an employee resident abroad, the provision of the company car for private use will not be subject to VAT in the country where the employee is resident. As well, if the employee effects a consideration other than a rental payment the taxation takes place in the country where the registered office of the entrepreneur is situated.
- Only in cases where the company car is provided by an entrepreneur to an employee resident abroad for a charge that constitutes a rental payment (whether in the form of a payment or wage deduction) do you determine the place of taxation pursuant to Art. 56 (2) of the Directive. In such cases the taxation will be in the country where the employee is resident, provided the further requirements set by the CJEU for a car rental are met.
- We highly recommend that employers review their employment contracts related to staff that are resident abroad to determine whether, based on the criteria set by the CJEU, their provision of company cars constitute a car rental. Depending on the particular circumstances, the consequence might be that the private use should have been taxed in another country and a correction to the tax treatment might lead to the elimination of VAT registration obligations abroad, VAT refunds, and VAT rate advantages.
- In contrast, the differences between the CJEU’s point of view and that of the German tax administration on this issue will have little impact on German entrepreneurs providing company cars to employees resident in Germany since even in case of a the provision of a company car free of charge, the provision of the company car (for private use) is treated as a deemed service for consideration and is therefore subject to VAT in Germany (provided the employer was entitled to an input VAT deduction related to the vehicle’s cost).
Frank Von Itter