The market is “not bad”, but “not excellent” either

The House of Automobile (HoA) has been hard at work in 2024 to combat the threats to the Luxembourg automotive market, holding dozens of meetings with ministers, trade unions and professional chambers to explain and raise awareness of the issues facing the sector. And 2025 looks set to be no different.

This intense activity has not failed to bear fruit. “The government consults us often” and is “very responsive”, says HoA spokesman Gerry Wagner. And while it does not implement all the HoA’s recommendations, some are taken on board.

Success in 2024

This was particularly the case during the discussions on the “Klimabonus mobilitéit” incentives for electric cars, which, although reduced in October 2024, were lower than expected. The same applies to the introduction of a bonus for used electric cars, which is a very positive point – even if the amount (€1,500) remains lower than that requested by the HoA.

All this without forgetting the question of the tax regime for the benefit in kind of company cars, which has been the subject of serious debate. An increase in the rate of benefit in kind for company cars was planned for early 2025, including a doubling of the rate for electric vehicles.

However, after much discussion, the government finally did an about-turn in November 2024 and decided to maintain the rates for 100% electric cars at their initial level for a further two years. A “very good decision”, according to Gerry Wagner, who is delighted that the government “recognised that it was too early to double this rate”.

The psychological shock of increased benefits in kind

Despite these successes, a number of measures are likely to have a negative impact on the Luxembourg car market. With the exception of 100% electric cars, the benefit-in-kind rate for company cars has been increased to a single rate of 2%.

A rate that makes it less attractive to use a company car with an internal combustion engine. “For everything that isn’t purely electric, the level of tax you have to pay on the car is in some cases higher than the tax you have to pay on a cash income”, explains Gerry Wagner.

So, of course, given an attractive purchase price, a rate of 2% is still an advantage, even more so for a cross-border worker who has to pay more tax in France or Belgium on this type of vehicle. But the risk is that, despite the financial advantage, the psychological effect will be enough to dissuade them from using a company car, according to Gerry Wagner. With the possibility that cross-border workers will ultimately choose to buy their own vehicle in their own country, rather than in Luxembourg, thus cutting into the country’s market.

The VAT imbroglio on leasing

There remains another very important issue for the HoA, which was the subject of much discussion in 2024 but which has not been resolved: VAT on leasing rentals. The issue is complex and stems from a 2021 ruling by the Court of Justice of the EU, the QM judgment.

In short, the CJEU ruling states that, in certain circumstances, VAT on a company car must be borne not by the company but by the user. There is a grey area, however: since company cars are by definition used by the company but also by the employee for private purposes, on which amount should this VAT be applied? On the rent in its entirety or on only part of the rent? The issue is an important one, since companies (with the exception of insurance banks) can reclaim their VAT – but employees cannot.

Belgium has clarified the situation by deciding that this amount is to be calculated on 65% of the rent. In addition, insurance and interest can be deducted from the rent, reducing the amount on which VAT is charged to less than 50%.

No clarification from the government

While the HoA had called for a similar clarification in Luxembourg, the government has yet to make a decision. It accepts that the company should determine the private and professional parts, but without specifying how this should be done. This is very difficult to estimate and, in the absence of clear rules, whether or not it is accepted remains at the discretion of the tax inspector. Ultimately, to avoid possible penalties in the event of an audit by the tax authorities, companies prefer not to take any risks and impose a rate of 100% for the employee.

This is a disincentive for the employee who, if he has to pay VAT, is going to pay 17% more for his car, or for the company which, so that the employee can have the same car, has to increase its budget by 17%. “That’s quite a lot,” observes Gerry Wagner. And it can create an “aberrant” situation: a Luxembourg resident who works in the same company as a Belgian resident will pay twice as much VAT on an identical company car as the latter.

More than half of all registrations made by companies

The HoA warns that the impact of these various measures on the Luxembourg car market could in any case be significant, especially given the crucial importance of company cars to the health of the car market as a whole.

In fact, in 2024, 46,311 private cars were registered, 53% of them by companies. And around 50% of company cars are used by cross-border workers, meaning that almost 12,000 registrations a year could be lost to neighbouring countries.

In addition, a massive switch from company cars to private purchases would result in a doubling of the length of ownership, and therefore a drop in the vehicle replacement rate, and consequently a halving of sales to private customers, or around 6,000 vehicles a year, according to the HoA. In all, more than 18,000 registrations a year would be at risk, representing around 40% of the new car market.

The market is “not bad”, but “not excellent” either

Not to mention the fact that this could slow down the electrification of the car fleet: in 2024, company cars accounted for 62% of electric vehicle registrations, compared with 38% for private cars.

The country’s car market, while “not bad” at the moment, is “not great either”, says Gerry Wagner. Dealers are having problems recruiting labour. And electrification represents a major challenge. “Everyone is suffering because some electric cars are being sold off in order to sell them, which is not good for the market in general, or for manufacturers, or for the European market, or for the local market. The government will therefore have to tread carefully if it is not to damage a car market that is under pressure.