Company car tax in Luxembourg: the 2% rule that changed the maths for everyone but EV drivers

A new petrol, diesel or plug-in hybrid company car registered in Luxembourg since 1 January 2025 is taxed on a flat 2% of its value every month, regardless of how little carbon dioxide it emits. An efficient fully electric car is taxed at 0.5%. On a €50,000 vehicle that is the difference between €1,000 and €250 added to your gross pay each month — before income tax and social security are applied to it.

The reform swept away the graduated CO2 scale that had governed company-car taxation for years. What replaced it is far simpler and far more brutal: combustion is combustion, and only electricity is rewarded.

How the benefit is actually calculated

The monthly taxable benefit is a percentage of the vehicle's global acquisition price when new, including options and VAT, less any commercial discount. Two consequences follow that catch people out:

• The new price always governs. The same new-car value is used for leased, rented and second-hand vehicles. Putting an employee in a three-year-old car does not reduce the benefit.
• Options count. The base is the price as configured, not the manufacturer's entry-level list price, so a heavily specified car carries a heavier benefit for its whole life.

The resulting amount is added to employment income. It is subject to wage-tax withholding and to social security contributions, whichever valuation method is used.

Combustion cars: one rate, no bands

Where a vehicle was first registered on or after 1 January 2025 and no purchase, leasing or rental contract was signed by 31 December 2024, the monthly rate is:

• Petrol, including petrol hybrids and petrol plug-in hybrids: 2.0%, at every CO2 level.
• Diesel, including diesel hybrids and diesel plug-in hybrids: 2.0%, at every CO2 level.
• Any other combustion engine: 2.0%.

There are no emission bands left. A brand-new plug-in hybrid emitting 20 g/km is taxed exactly like a large diesel saloon. This is the single most commonly misunderstood point of the reform: buyers who chose a plug-in hybrid expecting favourable treatment did not get it, because the regulation treats it as a combustion vehicle, not as an electric one.

Electric cars: 0.5% or 0.6%, until the end of 2026

For fully electric vehicles first registered by 31 December 2026 — or covered by a contract signed by 31 December 2026 and registered by 31 December 2027 — the rates in force during 2026 are:

• 0.5% where electrical consumption is at most 180 Wh/km, equivalent to 18 kWh per 100 km. No power limit applies to this test.
• 0.5% where consumption is at most 200 Wh/km, equivalent to 20 kWh per 100 km, and maximum net propulsion power is at most 150 kW.
• 0.6% where neither test is met — in practice, cars consuming more than 20 kWh per 100 km, or consuming between 18 and 20 kWh per 100 km with more than 150 kW of power.

A hydrogen fuel-cell vehicle also takes 0.5%. The consumption and power figures used are those on the certificate of conformity or registration certificate, not a manufacturer's marketing claim — which matters, because a powerful electric SUV can easily fall on the wrong side of both tests.

The cliff on 1 January 2027

Unless the regime is extended again, fully electric vehicles first registered from 1 January 2027, without a contract signed by 31 December 2026, move to 1.0% where either efficiency test is met and 1.2% where neither is. That is a doubling. For anyone weighing an electric company car, the date on the contract is now worth real money: signing before the end of 2026 and registering by the end of 2027 locks in the lower rate.

Older contracts keep the old scale

The previous graduated scale survives through a transitional rule. It still applies to combustion vehicles registered between 1 January 2023 and 31 December 2024, or covered by a contract signed by 31 December 2024 and registered by 31 December 2025. For petrol engines, including petrol hybrids and plug-in hybrids, those rates run:

• Over 0 and up to 50 g/km: 0.8%.
• Over 50 and up to 80 g/km: 1.0%.
• Over 80 and up to 110 g/km: 1.2%.
• Over 110 and up to 130 g/km: 1.5%.
• Above 130 g/km: 1.8%.

Note carefully what triggers which regime. It is not simply the year of the lease. It is the combination of the contract signature date and the first registration date, and a car registered during 2025 can still sit on the old bands if the paperwork was signed in time.

What an employee contribution does — and does not — do

Employees often pay something towards the car. Whether that reduces the taxable benefit depends entirely on how it is structured:

• A fixed contribution deducted from net pay reduces the taxable benefit directly.
• A contribution towards the leasing or rental cost is deductible, but only up to 20% of the leasing or rental cost borne by the employer.
• A contribution to the purchase price does not lower the valuation base or the percentage. It is instead amortised against successive monthly benefits — potentially reducing the benefit to zero for a period, after which the normal monthly charge resumes. The recognised contribution is capped at 20% of the acquisition price borne by the employer.
• A per-private-kilometre charge can be deducted only where actual private kilometres are established precisely through a logbook. No deduction is available for home-to-work travel.
• Variable costs paid personally — fuel, repairs, maintenance — do not reduce a benefit calculated under the flat-rate method.

That last point is the one that costs employees money. Paying for your own fuel changes nothing at all if the flat-rate method is used.

The alternative: the logbook method

The flat-rate percentage is a convenience, not an obligation. An employer may instead value the benefit at actual cost, dividing the vehicle's total running costs by total kilometres and charging the employee's private mileage at that rate. It requires a rigorous logbook, and it only pays off where private use is genuinely low. For most Luxembourg employees, whose cars double as family transport, the flat rate wins.

The other benefits in the same package

A company car rarely arrives alone, and the neighbouring benefits are treated far more generously:

• Employer contribution to rent: exempt up to 25% of the monthly rent, capped at €1,000 per month, where the statutory conditions are met. For a younger employee renting in the capital this is worth considerably more than a downgraded car.
• Participative bonus: half of a qualifying prime participative is exempt from tax, within specific conditions and limits.
• Subsidised employer loans: the interest saving on a reduced-rate or interest-free loan from the employer is exempt within defined limits.

Set against a 2% car, these are the levers worth negotiating. A €50,000 combustion vehicle adds €12,000 a year to taxable pay; an exempt rent contribution of €1,000 a month adds nothing at all.

What to check before you sign

Three questions decide the tax cost of a company car in 2026. Is it fully electric, and does it clear 18 or 20 kWh per 100 km on the conformity certificate? Will it be registered before the end of 2026, or does the contract at least predate 1 January 2027? And is any employee contribution structured as a deduction from net pay rather than as a payment for fuel, which the flat-rate method ignores entirely?

For the wider payroll picture, see our guides to Luxembourg's tax classes, gross-to-net salary and the 2026 CO2 tax on fuel, which lands on the same drivers from the other direction.