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After-tax.net volume 8, issue 2

January 2011


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Company cars – Taxation upon repurchase of leased cars

The providing of company cars is current practice in Luxembourg and is part of the remuneration policy of many companies. Most often, the car is leased by the employer from a leasing company and can, at the end of the leasing contract, be repurchased at a price determined when the contract is concluded; this is more especially the case with financial leasing arrangements. The practice shows that the repurchase price, also called residual value, is often fixed at 10% of the price of the new vehicle, which is in most of the cases less than the actual market value of the vehicle at the end of the contract.

For a couple of months, in the frame of wage withholding tax audits, the direct tax authorities (Administration des Contributions), request information from employers in relation with company cars repurchased by employees as from 1 January 2009. As a matter of fact, the tax authorities consider that the repurchase of the car at a price below market is a fringe benefit taxable in the hands of the employee. The benefit, which is assessed as the difference between the market price of the vehicle and the price paid by the employee, is taxable at the time of repurchase as a non-recurring income. This taxation is independent from the taxation of the benefit linked to the private use of the car during the life of the leasing contract, generally assessed at 1.5% per month of the price of the new vehicle.

In order to determine the taxable basis of the benefit, the tax authorities have developed a table setting average market values depending on the age of the vehicle. The market value of a vehicle of 36 months is fixed at 45% of the purchase price; it goes down to 35% for a vehicle of 48 months and 25% for a vehicle of 60 months. According to our information, it is however possible to use a different market value provided it is duly documented, for instance by the report of an expert or by a publication.

Deloitte view

Employers who have provided leased company cars to their employees with low residual value are advised to inform them of the risks linked to the repurchase of their vehicle. Whether the related tax should be borne by the employee or by the company should be addressed in this context.

For leasing arrangements currently in place and presenting these features, companies wishing to be compliant with the administrative practice could consider an upfront taxation of the benefit linked to the repurchase of the car, based either on the table of the tax authorities or on an alternative market value duly documented, the assessable basis being the difference between the market value and the price paid by the employee.

Other solutions, such as a renegotiation of the arrangements in place with the leasing provider, could also be explored.

On the longer term, employer may also be interesting in revisiting their global company car policies.

The professionals from Deloitte can assist in these areas.

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