Spain: New Tax Doctrine for Employee Use of Company Vehicles

Published on 28 March 2022

One of the most popular payments in kind in the Spanish labour market, apart from the famous restaurant vouchers, is the assignment of company vehicles to employees, especially to those in management positions or working in sales.

Gustavo Yanes Hernández Tax Lawyer +34 91 319 96 86

As strange as it might seem, until now, Spanish doctrine (including the Spanish Central Economic-Administrative Court or “TEAC”) classified the assignment of company vehicles to employees as a transaction subject to value added tax (“VAT”) in proportion to their private use of the vehicle. In practice, this meant that employers were obliged to invoice these payments in kind to employees, including any applicable VAT. The difficulties caused to the employee-company relationship by the Spanish tax authorities’ interpretation are evident, especially in an already tense Spanish labour market.

However, and while it should not be considered as valid in all cases, the expression “we’ll always have Europe” is quite appropriate here. In recurring case law regarding this matter, the Court of Justice of the European Union (“CJEU”) has ruled that a transaction for payment subject to VAT exists if (i) there is a direct connection between rendering the services (here, the assignment of the company vehicle) and compensation received in exchange, and (ii) such compensation may be measured in cash terms. Unlike the Spanish tax authorities, the CJEU furthermore concludes that making a payment in kind by providing a company vehicle does not automatically entail the accrual of VAT.

It was precisely such payment in kind upon which the TEAC’s jurisprudence was based in order to justify that this part of the salary would have necessarily been subject to VAT. However, due to said jurisprudence from the CJEU, the TEAC had to change its criterion which, in turn, is binding for Spanish tax authorities.

From now on, the Spanish tax authorities thus have to verify, through inspection proceedings,  not only the existence of a direct connection between the assignment of the vehicle and the services rendered by the employee (a requirement which seems to be fulfilled a priori in most cases), but also that the employer receives compensation from the employee which can be measured in cash terms. In order to meet this last requirement, it must be proven that the employee has waived part of his/her monetary salary, that he/she is making payments to the employer similar to rental payments or, alternatively, that it is explicitly agreed that the work performed by the employee is equivalent, in financial terms, to the assignment of the company vehicle.

In conclusion, we welcome this change in Spanish tax doctrine and hope it affords greater freedom of contract to employers and employees to decide to what degree this employment benefit may be subject to VAT.