Luxembourg Tax Alert 2025-07

New Circular 807‑1, issued by the VAT authorities on 21st October 2025 repeals Circular 807bis (issued on 28th April 2023). It reiterates prior guidance and clarifies the effects of the “QM” case law (C-288/19), ruled by the Court of Justice of the European Union (“CJEU”) in January 2021.

Background

As a reminder, on 20th January 2021, the CJEU clarified the VAT treatment of company cars provided by employers to employees (see our tax alert 2023‑12). In essence, the Court held that the supply qualifies as a “long‑term hire of a means of transport” when the employee has the right to use the car for private purposes (for an agreed period of more than 30 days) against the payment of a rent and the car remains permanently at his disposal including for private purposes.

As a result, such supply should be subject to VAT at the place of residence of the employee. The employer should thus be able to collect and remit the VAT in each country where its employees reside (i.e. mainly in Luxembourg, Germany, France and Belgium).

While Luxembourg had already issued two circulars with respect to the company cars, the latest circular further clarifies several points, most significantly that it is not possible anymore to allocate a portion of use as “professional”, reducing consequently the VAT base.

What the new Circular changes and clarifies

New development
When is there a taxable rental?
Taxable basis

New development

No split between “professional” and “private” use

This Circular ends any previous practice of differentiating the VAT treatment of company cars between a deductible “professional” portion and a taxable “private use” potion. Under the new guidance, the previous position that would have consisted in reducing the taxable basis by allocating a fraction of the car’s use as “professional” is now explicitly prohibited. Therefore, the turnover should be fully subject to VAT in Luxembourg (or other countries, where applicable and depending on local rules which may be contradictory with the ones applicable in Luxembourg, i.e. in Belgium). As a consequence, companies should be entitled to apply a full input VAT recovery right on VAT in connection with company cars, in application of the direct allocation method.

The VAT authority’s rationale laid in the fact that providing a car to an employee against remuneration constitutes a rental, falling within QM case-law when the conditions related to “long‑term hire of a means of transport” are fulfilled. As a result, the authorities consider that the employer effectively renounces any right to use the vehicle for its own business purposes other than as a lessor, as the employee has an “exclusive” right to use the vehicle.

The Circular further specifies that where an employee used its company car for the employer’s purposes, this employee should be considered as performing a distinct service for the employer and may be reimbursed for the expenses incurred (i.e., such as fuel).

When is there a taxable rental?

The Circular stresses that taxable persons must assess the contractual relationship to determine whether the company car is made available free of charge or in return for consideration.

Repeating the Circular 807, the new Circular reiterates that a vehicle is regarded as provided in return for consideration where the employee pays the employer for use, the employer withholds part of the employee’s remuneration to benefit from the vehicle, or the employee elects the car in lieu of other agreed benefits. Therefore, a fixed “car allowance” should explicitly be treated as consideration.

Taxable basis

Where Luxembourg is the place of taxation of rental of means of transport (and therefore for company cars provided by employers to employees), the taxable basis should consist in the total remuneration for the supply of services (i.e., everything the service recipient (or a third party) pays the supplier, regardless of how the payment is billed or made).

With respect to services provided by an employer to an employee for a consideration, the VAT law requires a taxable basis of at least the “normal value” of the service. Practically:

If the employer leases or rents the car from a third party, the taxable basis should be at least the rent or lease payments paid to the lessor;
If the employer purchases the car, the taxable basis should be at least the car’s depreciation allowance spread over five years;

Any additional costs borne by the employer in providing the car should be added to the taxable basis.

Consequences regarding cross-border car rentals

As long‑term hire of a means of transport should be taxable where the beneficiary is established or has their domicile or habitual residence, the companies must manage VAT compliance obligations in every Member State where employees reside.

OSS: The VAT authorities officially confirmed in this Circular that, for VAT due from 1st July 2021, the taxable persons could use the One-Stop-Shop (“OSS”) for reporting and payment obligations in the other Member States, where applicable. This Luxembourg perspective should nevertheless be compared to the position taken in the employee’s residence country, where the VAT is due.

Regularization: This Circular allows a taxable person providing a vehicle to an employee having his domicile or habitual residence outside Luxembourg and who previously declared private use as taxable in Luxembourg but later decide to apply VAT in the other EU country retroactively (which could be the case for France, who just shared their position) to adjust the Luxembourg VAT by neutralizing the private-use amount previously taxed in Luxembourg for the overlapping period and align the input VAT deduction on the car accordingly. However, this can only be performed for years not subject to the statute of limitation (5 years). Moreover, the taxable person must notify the competent Luxembourg tax office in writing of the intention to file corrective returns and attach supporting evidence for each year concerned.

Employers which have not yet considered the consequences of the QM case on lease cars put at the disposal of their employees should act now. On top of the clarifications brought, this circular serves as a useful reminder that VAT often applies to company cars put at the disposal of employees, and that appropriate measures should be taken to ensure VAT obligations are met, in Luxembourg and abroad.

Your team of VAT experts remains at your disposal for any questions you may have regarding the above.