VAT and company cars as benefits-in-kind

06.2013

For many years, there was an on-going debate concerning the benefits-in-kind received by employees from the perspective of withholding tax. Certainly, changing the historical custom of not taxing this income was quite challenging.

Now the focus of the debate seems to be on VAT. Until recently, company cars were not charged with VAT, but since the Spanish tax administration‘s response of 30 May 2011 (V1379/2011), it was established that, in some cases, the private use of company cars by employees is indeed subject to VAT. This means that: 1) The company can deduct 100% of input VAT for the purchase of the car – instead of 50%, as was customary; 2) Employees shall pay not only withholding tax, but also VAT, for the private use of the car. In practice, many companies still do not tax these operations, and when they do, it is usually them who pay VAT for their employees as a matter of courtesy.

In that case, there is a double benefit-in-kind: the private use of the company car and the payment of VAT by the company. In any case, the consultation to the tax administration only referred to the case where an employee is granted the use of the company car in change for a lower salary when negotiating the renewal of an employment contract.

But what happens if there is no connection between the salary and the use of the company car, as is usually the case with certain professional categories? This is still under debate and, unfortunately, case-law does not help here. In this case, the drafting of the contract plays a very important role.

++Published at the tax newsletter of the German Chamber of Commerce related to VAT news.++