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Luxembourg: The importance of the terms of agreements in VAT and leasing


The Court of Justice of the European Union (CJEU) issued a decision on October 4 2017 that clarifies the VAT treatment of certain automobile leasing agreements.

The case before the court involved a UK auto financing company that offers a lease agreement that includes monthly payments that cover about 60% of the vehicle price (including financing) and an option for the lessee to purchase the vehicle for the remaining 40%, which is roughly its market value. This type of lease is designed for customers who are unsure whether they will want to purchase the vehicle at the end of the lease (which is the case for about half of lessees).

The financing company took the position that the lease agreement qualified as a supply of services for VAT purposes for which VAT was due on each instalment. The UK tax authorities disagreed, stating that the leasing transaction was a supply of goods, with VAT being chargeable in full when the vehicle is handed over to the customer.

To resolve this issue, the CJEU had to interpret Article 14.2b of the VAT Directive, which provides that a hire-purchase agreement is treated as a supply of goods only if the agreement provides that the property was transferred in the "normal course of events" upon the payment of the final instalment. Specifically, the court had to decide whether the existence of an option is sufficient for such treatment, or whether it is necessary to determine the economic purpose of the transaction.

The CJEU held that, for a lease agreement to qualify as a supply of goods, it must include an option that allows the transfer of ownership of the property to the lessee, and it must be clear from the terms of the agreement, as objectively assessed at the time it was signed, that ownership will be transferred at the end of the lease or, in the words of the CJEU, exercising the option is the "only economical rational choice" for the lessee.

Based on the CJEU decision, it can be presumed that the lease in the case did not qualify as a supply of goods. The pricing structure and the fact that only 50% of lessees exercise the option make it clear that the exercise of the option is not the only rational choice for the lessee.

As an example of the impact of the CJEU decision, Luxembourg law does not include the phrase "in the normal course of events". Thus, any lease with an option to purchase, regardless of its value and whether exercising the option is the "only economical rational choice" of the lessee, would be treated as a supply of services in Luxembourg.

The CJEU decision is a useful clarification of the VAT treatment of leasing agreements, even in cases where it may not be entirely obvious that exercising the option is the "only rational economic choice" of the lessee.


Christian Deglas ( and Michel Lambion (

Deloitte Tax & Consulting Luxembourg


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