Private use of a company car and payment of VAT in another country

Private use of a company car and payment of VAT in another country

Long-term provision of a car to an employee residing outside the Czech Republic may lead to VAT registration in another Member State. This was recently confirmed by the Court in its judgment C-288/19, which dealt with the case of two employees of a Luxembourg company resident in Germany.

The possibility to use a company car for private travel is a popular and widespread benefit. As the private use of business property without payment prevents the deduction of VAT on the purchase price of the car, you need to take a decision on the scheme under which you will provide the car to the employee.

The first option is for the employer, when purchasing the car, to estimate the proportion in which the employee will use the car for business and private purposes. The employer can then claim a VAT deduction on the purchase of the car in the same proportion and monitor over the next five years whether the actual proportion differs by more than 10% from the original assumption. For income tax purposes, the increase in the employee's income by 1% of the value of the car does not affect the VAT regime. From a VAT perspective, such a car is provided to the employee free of charge.

The second option is 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 is where the complication of registering and paying tax in another country can arise. According to the Council Regulation, which is also referred to in the Czech VAT Act, the place of taxation of long-term rentals is the recipient's residence or the place where they usually reside, if this place is not their residence. In practice, this can lead to a situation where an employee residing in Germany is provided with a car by a Czech company on a long-term basis, even for private travel, in return for a consideration. The place of taxation of such a rental will be shifted to Germany according to the employee's residence and the Czech company will have to register for VAT in Germany and pay VAT on the rental there. The same applies to a German company that provides a car to its Czech employee residing in the Czech Republic. In this case, the long-term provision of a car for a consideration will also lead to VAT registration in the Czech Republic and the obligation to file tax returns and pay tax there.

However, to be a lease, the main feature of this relationship must be met, which is the exclusion of other persons from using the car. If it is to be a lease, the employer cannot use the car to send an employee on a business trip other than the employee who is paid a certain amount of money from their wages in return for the possibility to use the car privately.

As the Court of Justice has stated, the concept of rent presupposes the existence of a rent in cash. The absence of payment cannot be compensated by a payment in kind. Where two employees working in the same position with the same workload have different rates of pay because one of them has a company car at their disposal for private use, there is no rent in relation to the employee with the car, since a benefit in kind cannot replace a rent in cash. In this case, the reporting of private travel would only result in an input VAT deduction adjustment for the employer.