Many employers provide their staff with a company car for private use as well. Whilst this is well established in income tax law, it also has VAT implications, which can quickly become complex, particularly in cross-border situations. The Lower Saxony State Tax Office (LfSt Niedersachsen) has provided important clarifications on this matter in a ruling dated 26 March 2026.
Company cars for private use as a hire service
If a company provides an employee with a vehicle for private use as well, this is regarded as a supply for consideration for VAT purposes. The employee receives the vehicle, in a sense, as part of their remuneration. For VAT purposes, this transaction is classified as the long-term hire of a means of transport to a non-business person. The Lower Saxony State Tax Office expressly confirms this view, referring to the VAT Application Circular and a letter from the Federal Ministry of Finance dated 3 March 2026.
The employee’s place of residence determines the place of performance
This classification has an important practical implication: the place where VAT is payable is determined by the employee’s place of residence. This follows from Section 3a(3)(2), third sentence, of the German Value Added Tax Act (UStG). Therefore, if an employee resides in another EU Member State, the VAT liability generally shifts to that Member State.
Not all EU Member States see it the same way
This is where the problem lies. Not all EU Member States agree with Germany’s classification of this as a letting service. Some countries classify the provision of a vehicle differently – for example, as a transfer of value without consideration – and base this on a judgement of the European Court of Justice dated 20 January 2021 (Case C‑288/19). These countries instead attribute the supply to the location of the employer. This can result in double taxation or non-taxation. The Lower Saxony State Tax Office expressly accepts this consequence and does not initiate any corrective measures beyond the national perspective.
Input VAT deduction remains unaffected
Another key point of the ruling concerns the employer’s right to deduct input VAT on the purchase of a vehicle or under a leasing agreement. Even if the provision of the vehicle’s use is not subject to tax abroad, this does not alter the situation. Provided the general conditions under Section 15 of the German Value Added Tax Act (UStG) are met and the vehicle is allocated to the company’s assets, the full input tax deduction remains in place. According to the ruling, any reduction is expressly ruled out.
What does this mean in practice?
This clarification is relevant for businesses with employees in other EU countries. They do not need to make input tax adjustments simply because foreign law does not treat the provision of a vehicle as a taxable supply. At the same time, they should bear in mind whether reporting obligations might arise in the relevant foreign country. As the classification varies across the EU, it is advisable to seek tax advice on a case-by-case basis, taking into account the relevant foreign law.
Source: Lower Saxony State Tax Office, decision of 26 March 2026, ref. no. S 7117-e-St 183‑5510/2026
Source: Haufe: Tax
This post and the accompanying image were created with the help of AI and have been editorially reviewed.
