Is VAT payable on personal use of a company car? Find out what has changed

The personal use of a company car may be subject to VAT, according to a recent interpretation by the Tax Authority. Find out what has changed.

The subject is not new, but questions continue to arise: is the personal use of a company car, or is it not, subject to Value Added Tax (VAT)?

To address the most frequently asked questions, the tax law team at Dower Law Firm sent Notícias ao Minuto a set of questions and answers on the subject.

So, what has changed? And when?

“The rule that the personal use of company vehicles may be subject to VAT does not stem from a new statute or a legislative amendment, but from an interpretation by the Tax Authority, set out in Circular Letter No. 25 088 of 21 November 2025 and made public at the beginning of 2026.”

In practical terms, what does this mean?

“According to the interpretation published by the Tax Authority earlier this year, if a company or self-employed worker has deducted VAT on the purchase, rental or leasing of a vehicle, and that same vehicle is used for personal purposes, such use is deemed to be a supply of services subject to VAT.”

Who is affected by this interpretation?

“In practice, the measure primarily affects companies and sole traders that have acquired electric, plug-in hybrid and LPG/CNG vehicles and have benefited from the right to deduct the tax. In its Circular Letter, the Tax Authority does not clarify whether this interpretation applies only to personal income tax (IRS) taxpayers or also to corporate income tax (IRC) taxpayers, although it is expected that both will be covered.”

How is the tax applied?

“Where a company vehicle is used, even partially, for personal purposes, the company must: (i) determine the percentage of kilometres driven for personal use; (ii) apply that percentage to the normal value of the service (e.g. the monthly cost of the vehicle or the rental payment); and (iii) charge VAT at the standard rate of 23% on that amount. It should be noted that this rule applies even where the personal use of the vehicle is residual.

As regards the percentage of kilometres, this is determined by the proportion of private use of the vehicle relative to the total kilometres driven. As for the normal value of the service, this must be determined in accordance with the VAT Code, taking into account the price, plus the related incidental expenses, that, under normal conditions of competition, would have to be paid to an independent supplier, at the time and place at which the transaction is carried out or at the nearest time and place, in order to obtain the same or a similar service.”

Does it make any difference if the employee, manager or director personally owns a vehicle?

“The fact that the user owns a vehicle does not automatically exempt them from taxation. The Tax Authority’s criterion is not the existence of another vehicle, but the actual use of the company vehicle for private purposes.

Therefore, if it can be demonstrated that the company vehicle is used exclusively for business purposes, no VAT is due. However, if there is any personal use, even occasional, the VAT liability remains, regardless of whether another personal vehicle is owned.”

What can I do to prevent the Tax Authority from considering that a company vehicle is used for personal purposes?

“It should be noted that, in its Circular Letter, the Tax Authority does not specify the type of documentation required to prove the situation, relying instead on the criterion of kilometres driven. Accordingly, it is important that companies keep proper records and establish clear internal rules on the use of their vehicles by directors, managers and employees.

In addition to the advisability of approving an internal policy on vehicle use, it appears to be truly essential that the company monitors and documents the use of its vehicles, keeping, for each one, mileage records and usage logs.

Depending on the role performed by the employee, manager or director within the company, particular attention is recommended with regard to the use of vehicles outside working hours, at weekends, on public holidays and during holidays.”

What if the company does nothing? What are the risks?

“In the absence of records, mileage logs or other documentary evidence capable of demonstrating that the vehicle is used solely for business purposes, the Tax Authority is entitled to presume the existence of personal use, shifting to the taxpayer the burden of proving otherwise.

The uncritical adoption of this new interpretation by the Tax Authority may give rise to additional VAT assessments and compensatory interest, and lead to the initiation of tax offence proceedings.

In light of the Tax Authority’s new interpretative framework, and with a view to avoiding the risks outlined, it is essential that companies seek technical advice and adjust their procedures.”