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Germany – EHS Candidate for Reform

Flat-rate taxation of privately used company cars

The flat rate taxation of privately used company cars in Germany aims to support the utilisation of company cars as a non-cash or in-kind benefit. The employee pays a monthly tax on 1% of the vehicle’s actual price at the time of initial registration. The value of the subsidy is about a third of the purchasing price of the car. Similar subsidies exist in Austria, Belgium, Denmark, Italy, Luxembourg, Poland, the Netherlands and Slovakia.

The subsidy makes combustion cars and their use cheaper for employees. In some cases, employees are provided with fuel cards, which further incentivise the use of the car privately. The company also benefits from company cars as they are treated as business expenses. It reduces taxes and lowers labour costs for the company. The financial benefits of the subsidy offer little motivation for employees and employers to opt for smaller, energy-efficient cars and use less fossil fuel.

© Denys Nevozhai / Unsplash

In 2021, two-thirds (1.7 million) of all newly registered cars in Germany were company cars. They are commonly replaced after three years of use and are sold on the used car market. The budgetary impact analysis of the subsidy was done by the German think tank and an environmental organisation Green Budget Germany. The foregone government revenue was estimated to be between EUR 3.2 and EUR 5.6 billion in 2019.

Environmental impacts caused by the subsidy include growing CO2 emissions and air pollution due to higher fossil fuel consumption, use of resources required to produce new cars, and increased amount of waste. Resources are also needed for building, maintaining and expanding road infrastructure to accommodate the rising number of vehicles.

The German Bundestag passed the act in 2019 to move towards greener transport. It has expanded the reduced taxation of company cars to electric and plug-in hybrid vehicles. It has also included a tax exemption for charging cars for free at the workplace. This preferential treatment for electric vehicles and plug-in hybrids in company car taxation will be applicable until 2030. Other options to incentivise the use of low or zero-emission vehicles would be to significantly increase the advantage of low-emission cars by raising the flat-rate tax for fossil fuel cars or including only low or zero-emission cars in company car schemes.

More information on the flat-rate taxation of privately used company cars and other candidates for reform in Germany and other Member States can be found in the country case studies and factsheets compilation.