2021, the ruling that changed everything
For decades the rule was simple: when a Luxembourg employer provided a company car to an employee, the VAT on private use was dealt with in Luxembourg, through the “deemed supply of services” mechanism. Whether the employee lived in Thionville, Arlon or Trier changed nothing.
On 20 January 2021, the Court of Justice of the European Union upset that balance. In its judgment in case C-288/19, known as the “QM ruling”, it held that providing a vehicle to an employee can constitute a long-term hire of a means of transport: taxable, like any hire of that kind to a private individual, at the place where the hirer resides. In other words, if the conditions are met, VAT is no longer due in Luxembourg but in France, Belgium or Germany, at the local rate.
The Luxembourg administration drew the consequences of the ruling in a first circular (no. 807 of 11 February 2021), clarified in 2023, then recast by circular no. 807-1 of 21 October 2025: the current reference text, which tightens certain essential points. For a country with one of the largest company car fleets in Europe and hundreds of thousands of cross-border workers, the stakes are considerable.
For consideration or free: the decisive step
The whole reasoning rests on a first, deceptively simple question: is the vehicle provided for consideration or free of charge? The answer determines radically different regimes, and this is where the costliest mistakes are made.
The vehicle is provided for consideration as soon as there is something in return, in one of three forms:
- A direct payment by the employee: for example a monthly deduction from net salary, or a debit to a shareholder's current account;
- Giving up part of the salary: the employee accepts a reduced gross salary “in exchange” for the vehicle;
- Giving up another benefit: a bonus or another element of the package, converted into a car.
Conversely, if the employee pays nothing, reduces nothing and gives up nothing, the vehicle is provided free of charge, and the classic Luxembourg regime applies (see below).
Qualification therefore requires a careful reading of the employment contract, the car policy and the payslips: a “mobility budget” clause, a mention of a contribution, a salary conversion; every detail counts. And some situations remain debated, such as the car budget an employee forfeits by declining the vehicle without being able to convert it into cash: circular 807-1 tends to see consideration there, while a strict reading of the QM ruling may doubt it. In these grey areas, caution and individual analysis are essential.
“Long-term hire”: three conditions
Consideration alone is not enough. For VAT to shift to the employee's country of residence, the provision must constitute a long-term hire of a means of transport, which requires three cumulative conditions:
- A permanent right of private use: the employee can use the vehicle for private purposes continuously, the car being assigned by name and available at all times;
- A right to exclude others: the vehicle is not shared; the employee has exclusive use of it;
- A duration of more than 30 consecutive days: in practice, almost all company cars.
Each condition deserves examination. A car policy that provides for, and actually applies, sharing of the vehicle among several employees defeats the exclusivity condition: the QM ruling then no longer applies and VAT continues to be dealt with in Luxembourg. But beware: a purely cosmetic sharing clause, never put into practice, will not survive an audit. If sharing is your strategy, it must be real, organised and documented: schedules, bookings, usage records.
Where and on what to pay, country by country
When the conditions are met (provision for consideration + long-term hire), VAT is due in the employee's country of residence, at the local rate, on a taxable base that varies with national rules. Two notions structure the calculation: the contractual value (what the employee pays or gives up, treated as VAT-inclusive) and the open market value (all the costs borne by the employer: lease payments, fuel, maintenance, insurance, or, for a vehicle owned outright, depreciation over five years plus running costs).
| Employee's residence | Rate | Taxable base |
|---|---|---|
| Luxembourg | 17% | The higher of the contractual value and the open market value, with no reduction for business use since circular 807-1 |
| France | 20% | Contractual value (France has not transposed the open market value mechanism for these transactions) |
| Belgium | 21% | Open market value where it exceeds the contractual value, with a flat-rate reduction for business use (65% private use retained) |
| Germany | 19% | Actual costs (logbook) or the statutory flat-rate method based on the vehicle's value |
Indicative summary of the rules applicable to provisions for consideration falling under the QM ruling; each situation must be checked against the legislation in force in the country concerned.
The most striking point of circular 807-1 concerns Luxembourg: no reduction of the base for business use is allowed any more in the case of provision for consideration. The administration's logic: if the provision is a hire granted to the employee, the employer has given up the use of the vehicle, so there is no longer any “business share” to deduct. For employers who used to reduce their base by 20, 30 or 40% of business use, the bill changes noticeably.
The free case: the classic rules remain
When the vehicle is provided free of charge, with no consideration from the employee, the QM ruling does not apply. The previous regime, still in force, applies: the deemed supply of services, taxable in Luxembourg.
Two key rules govern it. First, a precondition: the deemed supply only applies if the employer has recovered the VAT on the purchase or lease of the vehicle. If it was not deducted, the VAT was already “blocked” upstream: no additional taxation of private use. Then the base: total costs net of VAT multiplied by the percentage of private use of the vehicle.
The whole difficulty lies in that percentage. Three approaches are found in practice: the logbook (precise but demanding), a documented flat rate (which must remain realistic), or using the direct-tax “benefit in kind” base as an approximation, tolerated by the administration. One point is too often forgotten: for VAT purposes, the home-to-work journey is a private journey. A flat rate that only counted weekends and holidays as private would therefore structurally underestimate private use, and weaken the file in an audit. Accepted practices are evolving, and the European trend is clearly towards tightening: better a defensible percentage than an optimistic one.
The German thorn
One case deserves separate treatment: employees residing in Germany. The German tax administration takes a singular view of the matter: it considers that the employee's labour is in itself consideration. Consequence: for Germany, any provision of a vehicle to a German resident is for consideration, even where Luxembourg, France or Belgium would see a free provision.
This divergence creates a real risk of double taxation: Luxembourg VAT under the deemed supply on one side, German VAT claimed on the other. Solutions exist: switching to a formalised provision for consideration, organising genuine vehicle sharing, or challenging the German position at European level, but none is trivial. And one element calls for particular caution: in Germany, VAT regularisations can take on a criminal dimension for company officers. For any employee resident in Germany, the analysis must involve a German VAT specialist.
Declaring via the OSS, and regularising the past
Paying French or Belgian VAT does not necessarily mean registering in each country. The One Stop Shop (OSS) allows you to declare and pay, from Luxembourg, the VAT due in the other Member States, in a single quarterly return centralised with the AED. The scheme is valuable but demanding: strict deadlines (last day of the month following the quarter, funds received by that date), a “nil” return compulsory even without transactions, and a registration that entails the obligation to declare all the business's eligible transactions there, a point to analyse before opting in if you also make distance sales or supply cross-border services to private individuals.
On the Luxembourg side, circular 807-1 brings a welcome counterpart: an employer that regularises VAT abroad can recover the Luxembourg VAT wrongly paid under the deemed supply for the same periods, within the limitation period, by informing its tax office and providing evidence of the foreign regularisation. The past is therefore dealt with in both directions: what is due abroad, and what can be recovered in Luxembourg.
Our conviction as practitioners: the absolute priority is compliance for the future. Dealing with the past is done in parallel, methodically, starting with France, the largest cross-border contingent, without letting the scale of the task paralyse action.
Our employer checklist
If you provide vehicles to your employees, here are the questions to address, in order:
- Map it out: which vehicles, for which employees, resident in which countries?
- Qualify each situation: is there a payment, a salary reduction, a benefit given up? Reread contracts, the car policy and payslips, not just the taxable benefit in kind;
- Check VAT recovery on the purchase, lease and running costs of each vehicle;
- Test the long-term hire conditions: permanent private use, genuine exclusivity, duration;
- Quantify: the base and rate applicable according to each employee's country of residence, and the impact of the tightening under circular 807-1 for your Luxembourg residents;
- Choose the reporting channel: OSS or local registrations, weighing the impact of the OSS on your other transactions;
- Document everything: contracts, car policies, usage records, proof of payment; documentation is what makes the difference in an audit.
Do you provide vehicles to cross-border employees, or are you discovering the subject as you read these lines? We audit your fleet, qualify each situation, quantify what is at stake and put the right reporting arrangements in place, regularisation included.