Impact of CJEU decision on VAT treatment of private use of company car in cross-border cases
The availability of a company car for employees to use for both business and private purposes is a popular benefit offered by many employers. However, employers should be aware that the long-term provision of a vehicle to an employee who is resident in another EU member state may lead to VAT registration, collection and payment obligations in that other member state.
This was confirmed by the Court of Justice of the European Union (CJEU) in a decision issued on 20 January 2021 (C-288/19), and the court clarified the conditions under which the business and private use of an employer-provided company car will be subject to VAT. The case before the CJEU involved the provision of a company car (for both business and private purposes) to two employees of a Luxembourg company who are resident in Germany. In its decision, the CJEU distinguished the situation where a company vehicle is made available to an employee free of charge and where the employee pays consideration in exchange for the use of the vehicle. If no consideration is paid, the provision of the vehicle is not subject to VAT if the employer did not deduct the input VAT it incurred on the purchase of the car, but if the employer was able to deduct input VAT, it must declare and pay VAT in the country in which it operates its business. If the employee pays consideration to use the company car for more than 30 days and can exclude other persons from using the vehicle, the transaction is deemed to be a normal supply of services (specifically, a supply of the long-term hiring of a means of transport) made at the place where the employee is resident, which can give rise to VAT registration and compliance requirements for the employer in that country. As the private use of business property free of charge prevents the deduction of input VAT on the purchase price of the car, employers will need to decide the basis on which to grant an employee use of the vehicle:
- The first option is for the employer, at the time it purchases the vehicle, to estimate the employee’s business and private use proportions. The employer can then claim a VAT deduction on the purchase of the car based on the proportion of business use and monitor over the next five years whether the actual proportion differs by more than 10% from the original assumption. (The increase in the employee's income by 1% of the value of the car for income tax purposes does not affect the VAT consequences. From a VAT perspective, the vehicle is provided to the employee free of charge.)
- The second option is for the employer to grant an employee the right to use a company car for a fee, which can be in the form of a payroll deduction. The private use of the vehicle is then treated as a service rendered, which, if it lasts longer than 30 days, is considered a long-term rental. This situation may give rise to VAT registration, collection and payment obligations in another country.
According to the EU Council Regulation, which is referenced in the Czech VAT Act, the place of taxation of long-term rentals is the place where the recipient is resident or the place where he/she normally resides if that place is not the residence. The impact of this rule is that where a company vehicle is made available on a long-term basis (even for private travel) to an employee residing in Germany by a Czech employer in return for consideration, the place of taxation will be shifted to Germany and the Czech company will have to register for VAT in Germany and pay VAT on the rental there. The same result would ensue where a German company provides a vehicle to its Czech-resident employee, i.e., the long-term provision of a car for consideration will require VAT registration in the Czech Republic and the obligation to file tax returns and pay tax there.
However, it should be noted that for the transaction to be considered a lease, the main feature of a lease relationship must be met, i.e., it must be possible to exclude other persons from using the vehicle. In other words, the employer cannot use the vehicle to send any employee on a business trip—only the employee who is paying a designated amount of his/her wages in return for the ability to use the car for private purposes can use the vehicle.
As stated by the CJEU, the use of a vehicle for private purposes in exchange for a “rent” payment presupposes a payment, which cannot be compensated by a payment in kind. For example, if two employees hold the same position and have the same workload but have different rates of pay because one employee has a company car at his/her disposal for private use, there is no rent in relation to the employee with the car, since a benefit in kind cannot replace a cash rental payment. In this case, the reporting of private travel would only result in an input VAT deduction adjustment for the employer.