The tax treatment of assignment of vehicles to employees

The assignment of vehicles by an employer to its employees is considered as a salary in kind for the portion of such assignment which allows the employee to use the vehicle for his or her own private purposes. Additionally, both the Tax Authorities and the Spanish Central Administrative Tribunal considered that this assignment for private use should in all cases be considered as service for consideration, and therefore subject to VAT. Employers were therefore under a duty to charge VAT to their employees over the value of this private use.

The European Court of Justice, however, has ruled that the assignment of vehicles to employees only amounts to a VAT-able service, when the employee provides for such assignment consideration, which is economically valuable and separable from the work performed.

In the same way, several rulings from the Spanish National Court (Audiencia Nacional) consider that the assignment of vehicles to employees is a salary in kind, subject to VAT, provided it is included in the employment contract (for example through a system of variable compensation) and the assignment results in the employees renouncing to a portion of their salary (or the employees must make a payment for the assignment of the vehicle).

The Spanish Central Administrative Tribunal, in its ruling from 22 February 2022 (3161/2019), therefore changed its approach in relation to VAT on assignment of vehicles to employees to adapt it to EU precedents – especially the ruling dated 20 January 2020 (Case C-288/19, QM). The Tribunal reviewed the case of a company who had provided vehicles for private use to several employees and one director. Spanish Tax Authorities held that such assignment amounted to a service for consideration and as such subject to VAT. Moreover and in order to determine the proportion which would correspond to private use, Spanish Tax Authorities considered that Personal Income Tax rules would also apply for VAT purposes.

The Spanish Central Administrative Tribunal reviews the position adopted by the Spanish Tax Authorities as regards the VAT treatment of the assignment of vehicles to employees and concludes that the principles set out in EU case-law should apply to determine such VAT treatment:

• The supply of goods or services by an employer to its employee cannot be deemed a transaction carried out for consideration for VAT purposes, simply as a result of such transaction being considered a salary in kind for personal income tax purposes.
• These transactions may be deemed transactions for consideration for VAT purposes, when the employee (i) makes a payment as consideration; (ii) agrees to renounce to a portion of his or her salary in exchange for the assignment; (iii) must elect between several alternatives and such election results in an amount being taken out from his or her salary.

The ruling, therefore, follows precedent from the European Court of Justice in relation to VAT and offers a general rule applicable to assignments of vehicles to employees, which affects a significant number of employers. It may therefore be convenient to review company policies in this respect.