Provision of company cars for private use - ECJ-ruling "QM" (C-288/19)

According to the ECJ, it is not considered a paid supply if the employee is actually not paying for the use.

If an employee is allowed to use a company vehicle for personal use as well without having to pay for it, the tax authorities have so far assumed that this is not a free of charge supply subject to VAT but rather a barter transaction. The employee performs their work and is remunerated through both wages and the use of the car. The employer is therefore compensated for the car use through the employee's proportionate work performance (see Section 15.23 (8) et seq. of the administrative guidelines to the German VAT Code).

The place of supply is determined in accordance with Section 3a (3) No. 2 Sentence 3 of the German VAT Code (corresponds to Article 56 (2) Sentence 1 of the EU VAT Directive) for the long-term leasing of a means of transport to non-taxable persons - i. e., in accordance with the employee's place of residence. For simplification, the tax base for the car rental is usually determined using the one-per cent rule.  The employer is allowed to deduct input VAT from the car expenses because the car is used for business purposes (even if its use for personal purposes is also permitted).

Following a referral by the Regional Tax Court of the German state of Saarland, the ECJ has now ruled that this scenario does not constitute a taxable supply for remuneration by the employer to the employee because the employee had neither made a payment nor used part of their cash remuneration to pay for the use of the car. In the specific case, there was also no agreement according to which the entitlement to use the car was linked to the waiver of other benefits. Even if a non-cash benefit is taxable for income tax purposes, this does not constitute a paid leasing of a means of transport. The ECJ apparently considers the taxation of an object allocated to the company and then supplied to an employee for their own personal use to be conceivable in principle. In the specific case, however, this failed because special rules prohibited the employer from receiving an input VAT deduction when obtaining the car.

Contractual agreement with the employee is decisive

The reasons given in the ruling show that the classification of the provision of a car as a VAT taxable service for consideration or as a free of charge supply depends to a large extent on the agreements between the employer and the employee. If, for example, the employment contract expressly stipulates that the employee waives a certain amount of their cash salary in return for personal use of the car, then a VAT taxable supply for remuneration seems to be likely. Because in this case the employment contract accepted by both parties defined a specific value for use of the car, the question arises whether the value should be assessed based on the one-percent rule or the contractually agreed amount. Here, many variants and structuring options are conceivable.

If, according to the principles of the ECJ, there is no supply for remuneration, but rather a free of charge supply, the place of supply is not the employee's place of residence pursuant to Section 3a (3) No. 2 Sentence 3 of the German VAT Code, but rather the place where the employer operates its business pursuant to Section 3a (1) of the German VAT Code (UStG). In a cross-border situation involving, for example, an employee living in Aachen, Germany being provided with a car (also for personal use) by their Dutch employer without any agreements such as that described above, the ECJ ruling stipulates that the car will not be taxed in Germany but rather in the Netherlands because that is the place of supply. However, the old rule can still be applied until the administrative guidelines to the German VAT Code have been amended. Arrangements can therefore be carefully drafted to make advantageous use of the differences in the VAT rate between the individual Member States.

Possibly no VAT taxation for banks, insurance companies, or other similar entities

The ECJ ruling is particularly interesting for companies that do not have an input VAT deduction for their regular output sales, e.g., banks and insurance companies. Applying the ECJ ruling, neither a barter transaction nor a free of charge supply should be taxable if there is no agreement that justifies a supply for remuneration according to the ECJ principles. In this case, however, it should also no longer be possible to deduct input VAT from the car-related input services.

Companies with cross-border car leases should check whether it is favourable for them to refer to the ECJ ruling and, if necessary, also adjust the employee agreements. Companies wishing to continue providing a paid service at the employee's place of residence should note that the VAT application decree could soon be adapted to the ECJ ruling (which would eliminate this option) and therefore be prepared. Until the national laws of the EU Member States are harmonised, double taxation or double non-taxation may occur.

Dated: May 5, 2021