Luxembourg: Guidance clarifies VAT treatment of company cars

The value added tax (VAT) authorities on October 21, 2025, issued new Circular 807‑1, which repeals Circular 807bis (issued on April 28, 2023). This new circular eliminates the previous distinction between the deductible “professional” and taxable “private use” portions for company car VAT treatment.

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 must 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 are entitled to apply a full input VAT recovery right on VAT in connection with company cars, in application of the direct allocation method.

The circular further specifies that when 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). 

Background

As a reminder, on January 20, 2021, the Court of Justice of the European Union (CJEU) clarified the VAT treatment of company cars provided by employers to employees. 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 is subject to VAT at the place of residence of the employee, and the employer is thus able to collect and remit the VAT in each country where its employees reside (i.e., mainly in Luxembourg, Germany, France and Belgium).

Read a November 2025 report prepared by the KPMG member firm in Luxembourg