The car sector is no exception to this rule. Whether it be at the level of direct or indirect taxation, the low tax rate or the wide scope of cost deduction, Luxembourg offers many fiscal advantages.
The specific tax instruments applicable to cars in Luxembourg are:
It is worth noting that Luxembourg does not impose either registration tax or a tax on diesel or LPG cars, as is the case in neighbouring such as Belgium.
For direct tax purposes, all costs relating to cars owned or leased by a Luxembourg company are fully deductible in principle. Should the car be available for private use by an employee, this should be recorded in the employee's tax return as a taxable fringe benefit.
If this is not done, theoretically it would require a balancing or regularisation of any deductions originally made by the company. The taxation of the car benefit can be carried out in two different ways:
Tax breaks for vehicle depreciation
Cars reported as assets in the balance sheet of a company are depreciated according to their estimated lifetime, like all depreciable assets with a lifetime of more than one year and an acquisition price above €870.
Generally, cars are depreciated over a four-year period on a straight-line basis. Cars can be depreciated over a shorter period if a company can justify their more intensive use.
For a leased car, the economic owner (determined by tax and accounting rules) is entitled to depreciate it.
In Luxembourg, two depreciation methods are usually allowed: the straight-line method and the declining-balance method, which can be applied to certain tangible goods (including cars but excluding buildings).
The taxpayer may change from the declining-balance method to the straight-line method, but not vice-versa.
The rate of the declining-balance method may not exceed three times the depreciation rate allowed under the straight-line method, nor may it exceed 30%.
Under the declining-balance method, the rate applies to the book value of the asset. The application of the declining-balance method was limited by a law passed in December 1993, which stipulated that only the owner of an asset who is simultaneously the user of the asset can apply this method.
This means that a lessor no longer has the right to deduct a depreciation charge calculated with the declining-balance method since the lessor is not the user of the depreciated asset. But this does not prevent the lessor from deducting a depreciation charge calculated via the straight-line method.
Cedit on investments
A company acquiring cars can be entitled in a limited number of circumstances to a tax credit on the assets, by virtue of a 'tax credit on investments' provision, although this is only possible under certain conditions.
For example, the asset must be put into value in Luxembourg. For leased cars, both the lessor and lessee (at mutual exclusion) can also benefit from this tax credit. A 10% tax credit is available for supplementary investment in new tangible assets located in Luxembourg and subject to depreciation (for a period of at least three years).
Supplementary investment is the difference between the total qualifying assets at the accounting year-end and the average value of qualifying assets at each of the five previous years.
It should be noted that vehicles not used for the transport of goods (ie vehicles for leasing or transport of persons), buildings, intangible assets, and second-hand assets are the most common assets that do not qualify for tax credit.
A 6% tax credit is also granted on the acquisition price of qualifying assets with a life of at least three years and costing more than EUR 870 up to EUR 150,000 and 2% credit on any excess. This rebate basically covers the same categories of fixed assets covered by the tax rebates for supplementary investment.
In Luxembourg, all vehicles belonging to physical or legal persons with their normal residence or place of business within the country must be covered by a Luxembourg registration card (ie must have Luxembourg licence plates).
The same provisions apply to cars which belong to persons not domiciled in the country but put at the disposal of persons (individuals or legal persons) established in Luxembourg.
d tax (taxe sur les véhicules automoteurs)
Annual road tax is applied to all motor vehicles registered in Luxembourg, ie private cars, buses, motorcycles, tractors, trailers and semi-trailers. The taxation rate is determined on the basis of one of the following:
Sub-categories have been defined for calculating the road tax according to vehicle weight (eg tractors; buses; trailers). However, we can say that the tax rate is more or less the same as in the first category.
VAT at 15% is applied to all supplies, intra-Community acquisitions, imports and services connected to cars, when these operations are deemed to take place in Luxembourg.
There may be some exceptions to this rule, eg supplies made to international institutions based in Luxembourg (European Commission, European Court of Justice, NATO, etc) are VAT-exempt.
Luxembourg's 15% VAT rate is the lowest in the European Union (except Madeira and some Greek islands), and can be compared to 16% in Germany, 17.5% in the UK and the Netherlands, 19.6% in France, 21% in Belgium, 25% in Denmark, etc.
In addition, in Luxembourg the VAT incurred by a VAT taxpayer in connection with cars (exclusively used for business) is fully deductible, which is not the case in most other EU Member States.
In principle, therefore, lease contracts signed with a Luxembourg lessor are deemed to take place in Luxembourg (country of the supplier) from a VAT point of view. Such operations will thus follow the Luxembourg rules, ie 15% VAT and full deduction right.
This is a major advantage for companies established in Luxembourg or leasing a car from a Luxembourg lessor (cross-border leasing).
VAT treatment of leasing
Leasing transactions fall into one of three categories:
In Luxembourg, leasing transactions where the lessee has the option to buy the car at the end of the contract are treated as a supply of services.
This supply will be deemed to take place and thus liable to the VAT of the country where the lessor is established, ie in Luxembourg.
The VAT base consists of the initial payment and subsequent payments, and VAT is payable with each instalment.
Should the lessee exercise his option to buy the car, the transfer of the car from the lessor to the lessee is considered as a supply of goods, which is liable to VAT at the moment of the transfer (see iii).
Leasing transactions where the lessee does not have the option to buy the car (because it is planned at the beginning of the contract that the lessor will remain the owner of the car) are considered as rental agreements and therefore assimilated to supply of services.
The rules explained above under the first scenario will also apply. However, since there is no transfer of goods at the end of the agreement, the rules relating to this transfer are not applicable.
Finally, leasing agreements where the lessee does not have the option not to buy the car (because it is planned at the beginning of the contract that he will become the owner at the end of the contract) are considered a supply of goods as from the beginning of the contract.
These supplies are deemed to take place where the goods are at the moment of the dispatch or transport made by or for the account of the supplier or the buyer.
When there is no dispatch or transport, the supply of goods is deemed to take place where the goods are when the delivery takes place.
When the supply of the car takes place in Luxembourg, it is liable to local VAT. The VAT base is the sum of all rental payments. However, the supply might be exempt from Luxembourg VAT, if the cars are exported outside Luxembourg (intra-Community supplies of goods, export of goods).
Legal and economic owner for accounting and tax depreciation
Luxembourg GAAP recommends to use the 'French approach' for the accounting of leased assets. This approach is based on the legal ownership of the assets meaning that the asset is recorded in the books of its legal owner (the lessor) as long as there is no legal ownership transfer.
Under this rule, leased assets must be accounted as follows:
For the lessor:
During all the time of the lease agreement, the asset is recorded as a fixed asset in the lessor's balance sheet and is depreciated according to its economic lifetime. The lease payments are treated as income in the profit and loss account of the lessor.
The asset is then transferred to the lessee at the term of the agreement when transfer of ownership takes place.
For the lessee:
During the lease agreement, the lessee does not record the asset in its balance sheet. The lease payments are treated as operating expenses in the lessee's profit and loss account. In addition, the lessee must disclose in the notes to the accounts all financial commitments connected to the lease agreements.
In addition to this recommendation, Luxembourg GAAP also mentions that leased assets may be accounted in accordance with IAS 17. Therefore, if the conditions foreseen in IAS 17 are met, the lessee will record the leased asset in its balance sheet. In this case, the accounting treatment is as follows:
For the lessor:
The lessor must record the minimum lease payments (minimum lease payments means the payments over the lease term that the lessee is or can be required to make, excluding costs for services and taxes to be paid by and be reimbursable to the lessor) as receivable in the balance sheet.
The annual lease payments are broken down into amortisation and interest. The amortisation component will reduce the receivable and the interest component will be treated as profit in the profit and loss account.
For the lessee:
The lessee must capitalise and depreciate the leased asset in his balance sheet and he must record a corresponding liability for the future lease payments.
The lease payments have to be apportioned into interest and capital. The interest portion of the annual lease payments is treated as an operational expense in the profit and loss account and the capital portion will amortise the liability.
At present, this second accounting method in accordance with IAS 17 is rarely applied by Luxembourg companies.
Please note that from a Luxembourg tax prospective, the goods have to be allocated to the economic owner. The lease agreements need therefore to be analysed in order to determine the economic and legal owner of the goods.
In this context, Luxembourg tax law distinguishes between financial lease contracts, operating lease contracts and non-full payout lease contracts.
Financial lease contract
A financial lease is a full payout lease contract. This means that the lease payments payable by the lessee during the non-cancellable lease term cover the acquisition and manufacturing costs of the asset and all incidental expenses, including the lessor's financing costs.
For leasing contracts for movable assets (like cars), the leased asset is allocated to the lessor if the contract meets the following requirements:
(a) Leasing contract (without option): the primary lease term must be from 40–90% of the ordinary useful lifetime of the asset according to official depreciation tables.
(b) Call-option contract: the primary lease term must be from 40% to 90% of the ordinary useful lifetime of the asset and the option price must be equal at least to the remaining book value on the basis of straight-line depreciation or to a lower fair market value.
(c) Contract with renewal clause: the primary lease term must be from 40% to 90% of the ordinary useful lifetime of the asset and the lease term foreseen for the renewal period must be equal at least to the future depreciation based on the remaining book value or to the lower fair market value.
Finally, for leasing contracts where the asset has been adapted especially to the needs of the lessee (so-called 'special leasing contracts'), the economic ownership is attributed to the lessee.
Operating lease contract
An operating lease is considered as an ordinary rental agreement: (a) the agreement may be cancelled at any moment; (b) the risk of increase or decrease in value for economic or/and technical reasons, insurance premiums, repair and maintenance costs of the asset are mainly borne by the lessor.
For an operating lease, the lessor is the legal and economic owner of the leased asset. Thus, the leased asset is attributed to that person.
Non-full payout lease contract
A non-full payout contract can be cancelled after a predetermined period.
The lease payments made during the lease term only cover part of the purchase price including all incidental expenses and the lessor's financing costs.
In non-full payout contracts of movable assets, the leased asset is attributed to the lessor if he is considered as the economic owner of the leased asset. The lessor will be considered as the economic owner in the following cases:
A) Lease contract (without options) - the lessor has no obligation to sell the leased asset to the lessee after the expiry of the lease term.
B) Sharing-of-sales proceeds contract - the asset is sold at the end of the contract. Should the sale proceeds not cover the unamortised principal, the lessee must record the difference in his profit and loss account. Any excess of the sale proceeds over the unamortised principal is to be shared between the contracting parties. The lessor is entitled to claim 25% or more of the realised profit (if the lessor is entitled to less than 25%, the asset is attributed to the lessee).
C) Final instalment contract - the lessee can terminate the contract after a certain time representing at least 40% of the useful lifetime of the asset and the leased asset is then sold by the lessor. The lessor is entitled to receive a final rental theoretically equivalent to total costs not covered by the rental received to date.
However, the amount of the final rent effectively payable by the lessee is reduced by 90% of the sale proceeds on the leased asset. If 90% of the sale proceeds plus the rental charged to the lessee prior to the sale are less than the lessor's total costs, the lessee must pay a final rent equal to the difference.
On the other hand, if 90% of the sale proceeds exceed the difference between the lessor's total costs and the rental charged prior to the sale, the lessor may retain the surplus.