VAT perspective on various options of providing company cars to employees
Providing company cars to employees for their private use is an increasingly common benefit. What are the VAT implications for employers when providing car to employees free of charge? Does the situation change if the cars are provided to employees for a consideration? And what is likely to change in the future?
Providing cars free of charge
From a VAT perspective, there is the question of the employer's entitlement to deduct input VAT, both upon the purchase of the car and upon purchases of fuel and other operating expenses. If the employer provides the car to the employee free of charge and is aware that the car will also be used for private purposes, the entitlement to deduct VAT upon its purchase should be reduced by a pro rata coefficient. For the first year, this may be determined by a qualified estimate. The same applies to fuel and other operating expenses. In the last tax return of the calendar year, the coefficient shall then be adjusted if the estimate differs from the actual ratio of business to private travel by more than 10 percentage points. If the employee pays for their own fuel for private journeys, the employer may deduct VAT on fuel in full.
Providing cars for consideration
If the car is provided to the employee for consideration, the situation will be different as it involves a taxable supply provided by the employer, and the company shall pay VAT on the consideration received from the employee. In this case, the car is used exclusively for an economic activity – i.e., either the company's own business, or its rental activity – and the company will thus avoid reducing the VAT deduction by a pro rata coefficient. Another advantage of this approach is a lower administrative burden. From a VAT perspective, it is not necessary to use the arm’s length price to determine the amount of the rent for the employee, as employees are not considered related parties. However, the agreed-upon price must have a rational basis and be economically justifiable.
Future developments
The amendment to the VAT Act currently under discussion at one point included the proposal that an employee should be regarded as a party related vis-à-vis their employer, effective from 1 January 2025. It would then be necessary to pay an arm’s length price (market price) for renting the car; and it would be also advisable to calculate whether it is worthwhile for the employer to pay VAT on the arm’s length price, or to reduce their right to deduct input VAT by a pro rata coefficient when providing the cars to employees free of charge.
However, this proposal sparked an extensive discussion among the professional public and is currently no longer part of the bill.
The income tax perspective on this benefit will be discussed in the next article.