VAT & Company Cars: What Rules Apply for Employers?

Providing an employee with a company car is a widespread practice in businesses, whether as a benefit in kind or a work tool. However, as soon as the vehicle can be used privately, tax issues arise, particularly concerning VAT.

In the tax ruling of April 30, 2025, the tax authorities clarified the applicable rules, relying on European and national case law. For employers, the stakes are twofold: understanding when making a vehicle available is subject to VAT and how to manage VAT deduction rights.

Our experts explain the new rules companies must follow.
 

When Should a Provided Vehicle Be Subject to VAT?

The rule is based on the concept of consideration.

With consideration (taxable)

If the employee pays a rental fee, has an amount withheld from their salary, or forgoes a benefit, the transaction constitutes a taxable service (article 256 du CGI)

Case law confirms that the form does not matter: whether the consideration is included in the employment contract, a separate agreement, or takes the form of renouncing a benefit, VAT applies.

Even if the amount paid by the employee is lower than the actual cost for the company, the transaction remains taxable.

For example: an employee may have a point-based credit convertible into additional salary to choose a higher- or lower-end vehicle model; they may also forego a bonus or additional remuneration in exchange for the vehicle. In these cases, VAT is due.

Without consideration (generally not taxable)

If the employee receives the vehicle free of charge, there is no taxable supply.

However, if the company deducted VAT when purchasing the vehicle, private use is considered a self-supply and must be subject to VAT.

Conversely, if VAT was not deducted at purchase (the most common case for passenger vehicles), no VAT is due.

Special Cases

The authorities emphasize that strictly professional use is not concerned.

Free shuttles provided by some companies for commuting are not taxed, except in specific circumstances (see below).
 

How to Determine the Taxable Base and VAT Territoriality

Determining the taxable base 

When VAT applies, the taxable base corresponds to :

• The rental amount paid by the employee, or
• The portion of remuneration the employee foregoes (salary deduction, point credit, renounced benefit convertible into cash).

Note: the authorities clarify that the employer is not required to apply a pro-rata adjustment based on actual private usage. The calculation is based solely on the consideration provided in the contract.

Determining territoriality

If both the employer and employee are resident in France, VAT is due in France and declared under standard rules.

If the employer is established in another EU member state and the employee in France, VAT is due in France, with the option to use the EU OSS (One-Stop-Shop).

A French company providing vehicles to employees residing in another EU country can also use this mechanism to declare VAT due in that country.

This system avoids the need for businesses to register for VAT in every member state.

Impact on Employers’ VAT Deduction Rights

VAT deduction at vehicle acquisition is central.
 

Vehicle provided to an employee with consideration

VAT on purchase is fully deductible. This is an exception to the general rules that prohibit VAT deduction on passenger cars.

Vehicle acquired for general business use

In principle, VAT is not deductible. But if the vehicle is subsequently used for rental purposes (e.g., permanently provided with consideration), adjustment is possible.

Free provision

If VAT was not deducted, no taxation occurs.
If VAT was deducted, as with a utility vehicle, private use counts as a self-supply and is taxable.

However, the notion of “permanent provision” remains unclear: the authorities consider deduction possible if the vehicle is continuously allocated to rental activity, without specifying the exact duration (full year or shorter periods). 

Case law clarifies that rental activity must be genuine and regular; a one-off provision is insufficient for deduction.

Company shuttles are a special case
Free commuting transport is considered a private expense for employees: no deduction is possible.

Exception: if the company proves that the transport is essential (e.g., difficult-to-access site or frequent trips), the expense may be linked to economic activity, allowing deduction for vehicles with more than 8 seats.

Providing a company car to an employee raises significant tax issues, particularly regarding VAT. The existence of consideration, the employee’s residence, and the nature of the use—private or professional—determine VAT liability. For the company, the treatment of VAT at the time of vehicle purchase directly affects deduction rights and reporting obligations.

Practical recommendations:

• Formalize the consideration in the employment contract or HR policy;
• Address VAT deduction questions at the time of vehicle acquisition;
• Check special cases (shuttles, employees abroad).

Proper understanding of these rules helps avoid tax adjustments and improves fleet management.

For further details, we invite you to contact our RSM experts.