For some time now, the company car privilege has been the focus of public debates. Indeed, the discussion goes hand in hand with a redistribution debate. On the one hand, the criticism is that the company car privilege is unfair, because it makes users of company cars financially better than people who use their private car. On the other hand, it is claimed that the company car privilege provides false incentives in terms of measures to reduce greenhouse gases. The counter is that this is all polemic. But one should also take into account the economic aspects that would accompany the abolition of the company car privilege. After all, a fairly large part of the German automotive industry depends on the sales of company and company cars. But is this enough to rule out a reform of the company car privilege? Or can the reform be used for real improvements?

Consumers and companies are looking forward to the coming autumn and winter with concerns. In addition to rising energy and food prices, the first relief measures by the German government with regard to the “Tankrabatt” and the EUR 9 ticket expired at the end of August 2022. Even if further measures to relieve the entire population or individual parts of the population have already been promised, there are already voices raising questions about the financial viability of these projects. Considerations on redistribution by parts of the federal government, as the SPD and the Greens demand, provide for a deletion of the company car privilege. Alternatively, we are also considering introducing an over-profit tax.

But what is the company car privilege and why is there a privilege in this context? What about the current tax question on this topic and what could be expected of employees and companies if a reform were initiated?

All these questions are clarified in the following fundamental contribution.

First of all, we should clarify the question of what the company car privilege is.

It must be noted that this term does not make use of any tax law basis. Rather, this is an implication by raising the word “privilege” to create a discussion incentive. Also the word company car is anything but clear, since not every employee is directly in an employment relationship of § 611 BGB, but also in an employment relationship according to § 611a BGB on the basis of an employment contract.

To put it simply, this is – as is probably to be assumed in most of these cases – the fact that an employee can use a car provided by his employer for company trips, as well as for private trips and trips between home and first place of work (place of work).

However, it is also conceivable that a sole proprietor or partner of a partnership uses a passenger car in addition to company trips for just such trips mentioned above. Furthermore, it must also be noted whether the operationally used car is controlled itself or by an additional driver.

The tax treatment must be distinguished between an income tax classification in the case of income tax or corporate income tax, as well as sales tax. In addition, it depends – also formally – whether it is an employee or an entrepreneur who is to be considered for this legal issue. In the following, only the consideration of an employee in detail should be the focus.

In the case of employees, the assignment of a company- and privately used car by the employer constitutes a receipt in monetary value for the employee (§ 8 (1) EStG), which is subject to a corresponding valuation in monetary value (§ 8 (2) EStG). Consequently, there is a monthly taxation with payroll tax, taking into account a taxation with the personal tax rate.

3.1.1. Assessment methods

In principle, two evaluation methods are available to the employee: the journey log method and the 1% rule. What lies behind the concept of a journey logbook is probably familiar to most workers in this context. This is an ongoing document in which strict requirements are imposed on the employee by the financial administration.

Simpler and probably more frequent form of evaluation by the employee is the so-called 1% method. Here, the employee pays monthly tax on 1 % of the domestic gross list price plus optional equipment. At the same time, the path of the employee between home and workplace is initially ignored. This is to be covered separately. In the case of the 1 % method, for each calendar month, 0,03 % of the above price shall be used for each kilometre of distance.

Under the journey log method, the part of the total expenses attributable to the use of journeys between the home and the first place of work can be used if the expenses incurred by the car have been duly demonstrated by means of documents and the ratio of private journeys to journeys between the home and the place of work.

3.1.2. Calculation Example 1% Method

An entrepreneur buys a car that he wants to make available to the employee for EUR 30,000. The domestic gross list price without optional equipment is EUR 42,000. The path of the employee between the apartment and the first place of work is 20 km easy distance. Social security aspects should not play a role in this example. A purely tax-legal view is taken from the point of view of the employee.

Consideration of the tax effects of the company car privilege per month:

EUR 42,000 x 1% = EUR 420

EUR 42,000 x 0.03% x 20 km = EUR 252

Total: EUR 420 + EUR 252 = EUR 672

(to be taxed monthly with the average tax rate)

Taxation at the entry tax rate:

EUR 672 x 14 % = EUR 94,08 payroll tax

Taxation at the top tax rate:

EUR 672 x 42 % = EUR 282,24 payroll tax

Taxes also apply to the entrepreneur (for example, a sole proprietor) who uses a company car for both business and private purposes. Entrepreneurs also tax private use with one of the two methods explained above.

In addition to the pure income tax topic around the company car privilege, one must also consider that sales tax also applies to the private use of a company car. After all, private use by employees or entrepreneurs is also always a service that one receives as an end user. Therefore, all sales tax aspects of the use of the company car privilege also regularly apply 19% sales tax.

Whether the cancellation or optimization of the company car privilege is a suitable measure to contain the coming costs of the state budget, to halt inflation or even to redistribute, and thus to finance the subsidy of public transport, probably depends very much at the moment on which political camp one stands and what objectives one pursues with these measures.

Following the view of the Greens, the company car privilege must be completely eliminated and other incentives for mobility created. By the way, this would have the supposed effect of relieving the state budget.

The fundamental question is whether the German automotive industry would remain globally marketable, with a business model that primarily relies on large combustion engines that emit a lot of CO2. It is time for a rethink, as quickly as possible and the companies do too, Green politician Nouripour said on this topic at the German press agency.

The current Finance Minister, Christian Lindner of the FDP, sees in these demands only one, quote, “left polemic”, which uses the word “privilege”. From this view it can be seen that the Finance Minister does not currently see any need to abolish the company car privilege.

Which views are held on the subject of company car privilege probably depends in the main on which socio-political perspective one would like to follow in this point.

Regardless of a political view, however, other social and economic aspects must also be considered.

Sometimes the political conception results from parts of society’s opinion on this topic.

If you compare an employee who uses an employer’s company car with an employee who drives, for example, a leased car, you can quickly calculate which of the two people hits a higher burden. While the employee with company car privilege only has to carry out taxation (with travel log or 1 % rule), the employee with his own leasing vehicle bears costs for leasing installment, insurance, car and other taxes and fuel completely himself. Both are entitled to the commuter fee as advertising costs.

This leads to a feeling of injustice for one or another employee who does not enjoy the company car privilege by his employer. This is reinforced by the political prospect of using the cancellation of the company car privilege for redistribution measures.

Likewise, the fact that the employer can claim the incurred costs as operating expenses will probably cause a disturbance for many employees. The fact that the employer has to pay sales tax for the own use of the car should probably not give much comfort.

If one considers the deletion of the company car privilege from economic perspectives, it can be stated that a redistribution can hardly be implemented decoupled from economic and tax issues. Because behind every car used for use by workers and entrepreneurs are companies in the automotive industry and the workers employed there. It should also be borne in mind that at present a large part of the cars used for company cars are vehicles produced by German companies.

Also to be considered in this area is the use of vehicles used as return vehicles by rental car companies or used car dealers. At all these levels, the state increases its budget.

So if you restrict the company car privilege to redistribute it, it hardly includes the loss of government revenue due to a decline at all these levels. Thus, one can seriously expect that after the cancellation of the company car privilege, the opposite effect will occur. This cannot be relevant for any of the parties involved. Rather, a gradual deletion and optimization of the company car privilege would probably be the better alternative, so that the market can adapt to the changed situation.

If one wishes to do justice while respecting the equality of all, the most just way would be to cancel the privilege by no longer allowing private journeys.

At present and according to internal information of the Handelsblatt, there is no deletion of the company car privilege for the aforementioned – and above all for political reasons.

Sometimes other measures, especially with regard to tax aspects, could be better suited as an instrument for a redistribution policy.