How company car taxation works
As part of a salary negotiation, companies agree with their employees that they will receive a company car and may use it for private journeys. In return, employees forgo part of their salary and receive additional remuneration in the form of a car rather than money. This is also known as a benefit in kind or non-cash benefit.
As a rule, the company pays the purchase, repair and maintenance costs for the employee, and often even the refuelling costs. This is because companies can deduct these expenses from tax as business expenses. The benefit in kind received, the taxable non-cash benefit, is subject to income tax and social security contributions for the employee - just like a salary. However, tax incentives come into play here.
There are two different ways to determine the amount of the taxable non-cash benefit:
Why it is often referred to as a privilege
The current company car regulation is perceived as a privilege for higher earners, as company cars are almost exclusively granted to those in higher salary brackets. However, the tax advantages they receive with the current company car scheme are financed by the taxpayers as a whole. This is why the current regulation is also known as the company car privilege.
In addition: If employees use the one per cent rule and the company covers the fuel costs, company car drivers effectively receive a car at a "flat rate", as the price remains the same from the employee's perspective, regardless of how many kilometres are driven privately each month. This generally leads to emission-intensive behaviour and privileges company car owners over people without a company car. Although the individual advantage in reality depends on many factors, various studies indicate that the real value of private use is regularly underestimated by the list price method.
Company cars and their carbon footprint
Germany has committed to reducing climate-damaging emissions by 65 per cent by 2030 compared to 1990 levels. This is particularly important in the transport sector. With 148 million tonnes of greenhouse gases in 2022, the transport sector has the third-largest share of greenhouse gas emissions in Germany. It accounts for 20 per cent of total emissions. This means that there is great potential for savings in the transport sector. However, the transport sector could become a major obstacle and ensure that Germany misses its climate targets. This is because, compared to other sectors, emissions in the transport sector have only been reduced slightly and therefore significantly too little. Between 1990 and 2022, greenhouse gas emissions in the transport sector were only reduced by 9.1 per cent. By comparison, industry reduced its emissions by 41.1 per cent in the same period and the energy sector by as much as 46.1 per cent. Current sector targets for transport were missed.
One of the main reasons for the poor climate balance of transport is misguided tax incentives, such as the tax incentives for classic company cars. Around 2.6 million new cars are registered in Germany every year, 60 per cent of which are registered for commercial use. Although the data for company cars is not collected separately, it is estimated that company cars account for 20 per cent of all new registrations.
Company cars are often only used as "annual cars" and then sold as used cars. The choice of company car therefore has a major influence on which cars are produced, purchased and driven. The current company car tax system primarily incentivises the purchase of large and emission-intensive vehicles. Conversely, this also means that the potential for electrification and emissions reduction has so far been little utilised.
In addition, the tax benefits for company cars are not only harmful to the climate, but also expensive and cost the state three to five billion euros every year.
A look at Germany's neighbouring countries shows that things can be done differently: In the UK, taxation has already been linked to ecological criteria for 20 years. Vehicles with high emission values are taxed at over three per cent of the gross list price, while the taxation of plug-in hybrids is based on the electric range. In Belgium, a CO2-based emissions factor is included in the taxation. This makes large and high-emission cars unattractive. By way of comparison, the taxation of company cars in Germany is between 0.25 per cent and 1 per cent.
If we put alternative approaches, such as the mobility budget, on an equal footing with the company car in terms of tax, the company car privilege will probably no longer be necessary. Many people already want to travel in a more sustainable and environmentally friendly way. At the end of the day, it's not just a question of choice but also of cost. If costs remain the same, CO2 emissions can fall significantly and many more people will feel encouraged to check whether the company car really suits them and what it could be instead. After all, it's not just the carbon footprint of a company car that is bad, it also sits around unused for 23 hours a day. Even more often in times of regular home office.
The inefficiency is particularly evident in large cities where space is at a premium. Shared and alternative mobility is not only more climate-friendly there, but also creates space that can be used differently. Many companies are looking to solve the problem by electrifying their vehicle fleets. But even individually used e-cars do not have better capacity utilisation, consume just as much space and also use a lot of energy in production - and that is not always green. As a solution for the vehicle fleet, companies can rely on corporate car sharing. Or they can offer their employees flexible mobility options with a mobility budget.
How company car taxation works
As part of a salary negotiation, companies agree with their employees that they will receive a company car and may use it for private journeys. In return, employees forgo part of their salary and receive additional remuneration in the form of a car rather than money. This is also known as a benefit in kind or non-cash benefit.
As a rule, the company pays the purchase, repair and maintenance costs for the employee, and often even the refuelling costs. This is because companies can deduct these expenses from tax as business expenses. The benefit in kind received, the taxable non-cash benefit, is subject to income tax and social security contributions for the employee - just like a salary. However, tax incentives come into play here.
There are two different ways to determine the amount of the taxable non-cash benefit:
Why it is often referred to as a privilege
The current company car regulation is perceived as a privilege for higher earners, as company cars are almost exclusively granted to those in higher salary brackets. However, the tax advantages they receive with the current company car scheme are financed by the taxpayers as a whole. This is why the current regulation is also known as the company car privilege.
In addition: If employees use the one per cent rule and the company covers the fuel costs, company car drivers effectively receive a car at a "flat rate", as the price remains the same from the employee's perspective, regardless of how many kilometres are driven privately each month. This generally leads to emission-intensive behaviour and privileges company car owners over people without a company car. Although the individual advantage in reality depends on many factors, various studies indicate that the real value of private use is regularly underestimated by the list price method.
Company cars and their carbon footprint
Germany has committed to reducing climate-damaging emissions by 65 per cent by 2030 compared to 1990 levels. This is particularly important in the transport sector. With 148 million tonnes of greenhouse gases in 2022, the transport sector has the third-largest share of greenhouse gas emissions in Germany. It accounts for 20 per cent of total emissions. This means that there is great potential for savings in the transport sector. However, the transport sector could become a major obstacle and ensure that Germany misses its climate targets. This is because, compared to other sectors, emissions in the transport sector have only been reduced slightly and therefore significantly too little. Between 1990 and 2022, greenhouse gas emissions in the transport sector were only reduced by 9.1 per cent. By comparison, industry reduced its emissions by 41.1 per cent in the same period and the energy sector by as much as 46.1 per cent. Current sector targets for transport were missed.
One of the main reasons for the poor climate balance of transport is misguided tax incentives, such as the tax incentives for classic company cars. Around 2.6 million new cars are registered in Germany every year, 60 per cent of which are registered for commercial use. Although the data for company cars is not collected separately, it is estimated that company cars account for 20 per cent of all new registrations.
Company cars are often only used as "annual cars" and then sold as used cars. The choice of company car therefore has a major influence on which cars are produced, purchased and driven. The current company car tax system primarily incentivises the purchase of large and emission-intensive vehicles. Conversely, this also means that the potential for electrification and emissions reduction has so far been little utilised.
In addition, the tax benefits for company cars are not only harmful to the climate, but also expensive and cost the state three to five billion euros every year.
A look at Germany's neighbouring countries shows that things can be done differently: In the UK, taxation has already been linked to ecological criteria for 20 years. Vehicles with high emission values are taxed at over three per cent of the gross list price, while the taxation of plug-in hybrids is based on the electric range. In Belgium, a CO2-based emissions factor is included in the taxation. This makes large and high-emission cars unattractive. By way of comparison, the taxation of company cars in Germany is between 0.25 per cent and 1 per cent.
If we put alternative approaches, such as the mobility budget, on an equal footing with the company car in terms of tax, the company car privilege will probably no longer be necessary. Many people already want to travel in a more sustainable and environmentally friendly way. At the end of the day, it's not just a question of choice but also of cost. If costs remain the same, CO2 emissions can fall significantly and many more people will feel encouraged to check whether the company car really suits them and what it could be instead. After all, it's not just the carbon footprint of a company car that is bad, it also sits around unused for 23 hours a day. Even more often in times of regular home office.
The inefficiency is particularly evident in large cities where space is at a premium. Shared and alternative mobility is not only more climate-friendly there, but also creates space that can be used differently. Many companies are looking to solve the problem by electrifying their vehicle fleets. But even individually used e-cars do not have better capacity utilisation, consume just as much space and also use a lot of energy in production - and that is not always green. As a solution for the vehicle fleet, companies can rely on corporate car sharing. Or they can offer their employees flexible mobility options with a mobility budget.