Luxembourg tightens VAT rules for professional use of company cars

At a glance

Luxembourg has removed the VAT deduction for business driving, creating a stricter compliance standard for company cars. This shift adds complexity that may require a review of your current fleet arrangements.

A closer look

On 30 October 2025, the Luxembourg VAT authorities released Circular 807-1 (dated 21 October 2025) regarding the VAT treatment of company cars provided to employees.

This is the third circular issued on this topic by the Luxembourg VAT authorities, effectively replacing the previous version (Circular 807bis of 28 April 2023). The frequency of these updates underscores just how complex and practically difficult this regime remains for employers.

Below are the key changes introduced by this new text.
 

The context: Company cars as a “lease”

As a reminder, following the Court of Justice of the European Union’s (CJEU) “QM” decision of 20 January 2021, providing a car is considered a lease subject to VAT when some conditions are met.¹ The taxable basis is any payment made or to be made by the employee.

As VAT is due in the employee’s Member State of residence, Luxembourg employers must navigate not just domestic rules, but also Belgian, French and German VAT compliance.

New restriction: No deduction for professional use of cars put at disposal of Luxembourg resident employees

For the arrangement to qualify as a lease, different conditions must be met. One condition is that the lessee (employee) must have the right to exclude others from using the car. In Circular 807-1 (the “new Circular”), the Luxembourg VAT authorities infer that by granting this right, the employer gives up its own right to use the car for its own business purposes.

This implies that the taxable basis for cars put at disposal of Luxembourg resident employees cannot be reduced to account for the employee’s professional use of the car.

This strict stance contrasts with Circular 807bis, which previously allowed the taxable basis to be reduced when the car was used for professional purposes (taxing only the private use). It also diverges from the approach in neighbouring countries:

• Belgium accepts a lump-sum reduction of 35% of the taxable basis to account for professional use (taxing only 65%).
• In its April 2025 ruling, the French VAT authorities consider that the employer is deemed to have determined the consideration by taking into account precisely the partially personal use.
• Germany also allows various methods, including logbooks to distinguish between private and professional kilometers, or flat-rate calculations based on the distance between home and work.
   

The “separate service” complexity

The new Circular adds that an employee who uses their company car for professional purposes is providing a separate service to their employer, for which they can be reimbursed.

The new Circular does not provide further detail on this service, leaving uncertainty about potential consequences. However, given the text’s structure and drafting, this most likely implies that the reimbursement amount cannot reduce the taxable basis.
 

Recovering VAT paid in Luxembourg

Lastly, the new Circular reminds employers that if they need to correct VAT due abroad for past periods, they can request a refund of the Luxembourg VAT paid during those same years (subject to the five-year limitation period). While Circular 807bis indicated that the refund could be requested in a single return, the new Circular refers to returns for each specific year concerned.
 

Conclusion

Notably, the new Circular does not specify an effective date, further complicating matters for affected persons.

Ultimately, the new Circular illustrates that nearly five years after the CJEU decision, open questions remain. It also serves as a reminder to act for employers that have not yet considered the full implications of this decision.

The Deloitte Luxembourg Indirect Tax Team remains at your disposal to discuss the potential impacts on your organization.

 

¹ We refer to our previous newsletter for further details: CJEU’s preliminary VAT ruling on the provision of vehicles by Luxembourg employers to staff members residing abroad– Advocate General’s opinion (C-288/19) (September 2020); CJEU’s decision (C-288/19) and Circular (807) of the Luxembourg VAT authorities on the provision of vehicles by employers to staff members residing abroad (8 March 2021); How to correctly apply VAT on company cars (11 May 2023); Belgian VAT circular: Impacts for residents with foreign employer-provided cars | Deloitte Luxembourg | Input VAT | News (5  September 2023); French authorities ruling about VAT on company cars (8 May 2025)