Taxation of Private Vehicle Use and Company Events
In our previous posts, we have always covered a single topic and discussed it in some detail. In this post, however, we will instead address two unrelated topics: private vehicle taxation and company events. Due to the scope and complexity of these topics, we will focus below only on selected aspects intended to provide an initial overview of each subject.
Taxation of Privately Owned Vehicles
I. General Information ×
Private automobile taxation is relevant both for the business owner—particularly in the case of sole proprietorships—and in the context of providing passenger cars to employees, including the shareholder-managing director of a corporation (“company car taxation”). If the car is used or permitted to be used not only for business trips but also for
- personal trips
- trips between home and the primary place of work
- trips home to visit family
—when the car is provided to an employee—this constitutes a non-cash benefit that must be taxed as part of the employee’s wages or taken into account by the employer as part of the payroll tax calculation. When the business owner uses the car personally—for example, in the case of a sole proprietorship—a corresponding withdrawal of the benefit of use is subject to tax. The following discussion focuses primarily on the provision of a car to employees. If the employee is also permitted to use the car for personal travel, there are essentially two methods for determining the portion of wages attributable to this in the form of a non-cash benefit:
- Flat-rate calculation using the so-called 1% method
- Individual calculation based on the maintenance of a logbook.
It is not possible to estimate the private portion based on other records. Furthermore, when filing an income tax return, the employee is not bound by the method chosen for withholding income tax; that is, the employee may switch methods on the income tax return if doing so is more advantageous.
II. The 1% Method ×
The value of personal use is to be calculated at 1% per month of the vehicle’s domestic gross list price. If the vehicle can be used for trips between the taxpayer’s residence and primary place of work, this this use must be valued at 0.03% per month of the vehicle’s domestic gross list price for each kilometer of the distance between the residence and the primary place of work—regardless of whether the vehicle is also used for private trips—and added to the employee’s wages (alternatively, for employment income, individual valuation at 0.002% of the gross list price per kilometer of distance and per trip is also generally possible). If the vehicle is used for one trip home to the family residence per week as part of maintaining two households, the value of this use is not subject to taxation for employees (unlike the use of a car by business owners themselves). If the car is used for more than one trip home to the family residence per week, a flat-rate benefit-in-kind of 0.002% of the domestic list price must be applied for each additional trip home, calculated for every kilometer of the distance between the place of employment and the employee’s own household.
The gross list price—even for used or leased vehicles—is the manufacturer’s suggested retail price for the vehicle in question at the time of its initial registration, plus the cost of factory-installed optional equipment (e.g., navigation systems, anti-theft systems) and plus sales tax.
The 1% method is not intended to result in taxation exceeding the total costs incurred for the car. Therefore, if the amount calculated using the 1% method exceeds the total annual costs of the car, the private portion is capped at the actual costs (so-called “cost capping”).
Taxation of the non-cash benefit at 1% is independent of the actual extent of personal use. Furthermore, the employee’s mere assertion that the car is not used for personal trips is not sufficient to avoid the recognition of a non-cash benefit under the 1% method. Taxation can only be avoided through a prohibition on private use agreed upon in the employment contract or a properly maintained logbook (see below).
III. Logbook Method ×
In addition to the flat-rate calculation using the 1% method, the value of personal use may also be determined based on the expenses incurred for the vehicle that are attributable to the personal trips to be reported, provided that the expenses are substantiated by receipts and the ratio of private trips to other trips is documented in a properly maintained logbook.
A properly maintained logbook must be kept in a timely manner and in a continuous format, and must fully and sequentially record the trips to be reported, including the total mileage reached at the end of the logbook. The logbook must allow for random spot checks. Minor deficiencies do not automatically invalidate the logbook if the information is generally plausible.
The logbook must separately and continuously document the distances traveled for business and personal purposes. For business trips, the following information is generally required:
- Date and odometer reading at the start and end of each trip
- Destination and, in the case of detours, the route taken
- Purpose of the trip and business partners visited
For personal trips, the mileage and date are sufficient; for trips between home and the primary place of work, a brief note in the logbook is sufficient. The required information must be directly evident from the logbook itself. A reference to supplementary documents is permitted only if it does not compromise the self-contained nature of the logbook entries.
The maintenance of the logbook cannot be limited to a representative period, even if usage patterns do not fluctuate significantly. The logbook may also be maintained electronically if it provides the same information as a manually maintained logbook and if subsequent changes to the recorded data are technically prevented or documented (tamper-proof).
The private use value is the portion of the vehicle’s total costs (including depreciation) that corresponds to the ratio of private trips to the total distance traveled. Costs borne by the employee are not included in the total costs and do not increase the value of use; the tax authorities do not object if these costs are included in the total costs and, in addition, reduce the value of use as a usage fee. The following example illustrates this: The employee bears fuel costs of 3,000 euros. The remaining vehicle costs borne by the employer amount to 7,000 euros. Private use accounts for ten percent of the total mileage. There are now the following options for determining the monetary benefit: If the vehicle costs borne by the employee are not included in the total costs, the taxable monetary benefit amounts to 700 euros (10% of 7,000 euros). If, on the other hand, the “no-objection rule” is applied, the monetary benefit initially amounts to 1,000 euros (10% of (7,000 euros + 3,000 euros)) and must then be reduced by the usage fee (fuel costs borne by the employee) down to (at most) 0 euros.
In addition to maintaining a proper logbook, a prerequisite for applying the logbook method is that the total expenses incurred by the vehicle be substantiated by receipts. According to a recent ruling by the Federal Fiscal Court, estimating costs not supported by receipts therefore precludes the use of the logbook method.
IV. Special Regulations for Electric Vehicles ×
For electric and hybrid electric vehicles, there are specific rules for determining the monetary benefit, which the legislature has amended repeatedly over time. For fully electric vehicles that produce no carbon dioxide emissions, have a gross list price of no more than 70,000 euros, and were purchased after December 31, 2018, and before January 1, 2031, the 1% flat rate is based on only 25% of the list price; when using the logbook method, in these cases only 25% of the acquisition cost of the passenger car or comparable expenses (e.g., lease payments) may be taken into account when determining the total vehicle expenses incurred. If any of the above conditions are not met, another (but lesser) tax benefit may apply.
Dr. Harald Riedel
Dr. Harald Riedel is a certified public accountant, tax advisor, and founding partner of PKF Riedel Appel Hornig GmbH, with more than 30 years of experience in auditing, tax consulting, and management consulting. He specializes in auditing and advising manufacturing, retail, and service companies; designing tax models; conducting business valuations; and advising on structural measures. Dr. Riedel is a member of the management board of PKF Deutschland GmbH and a member of the Chamber of Tax Advisors and the Chamber of Public Accountants.
Dr. Harald Riedel will be happy to assist you:
His areas of expertise include:
- Restructuring/Conversions
- Acquisition and sale of companies
- Corporate tax law
- International tax law
- Contact person for small and medium-sized businesses
His key industry areas are:
- Automotive
- Fashion
- Service Companies
- Renewable Energy
Company Events
The treatment of company events for income tax and sales tax purposes is a recurring issue in day-to-day consulting practice, but is particularly relevant during tax audits.
The treatment of company events for income tax and sales tax purposes is clearly defined by statutory regulations and applies to both employers and employees. For income tax purposes, a tax-exempt allowance of 110 euros per employee per event applies, including sales tax. A maximum of two company events per employee per calendar year qualify for this tax benefit. Starting with the third event, the entire amount is classified as taxable wages. If the expenses exceed the 110-euro exemption, the excess amount is treated as taxable wages (Section 19(1)(1a) of the Income Tax Act [EStG]), meaning that, in principle, the employee would have to pay taxes on this “benefit” to that extent. Alternatively, however, the employer may tax the amount exceeding the exemption limit at a flat tax rate of 25% plus the solidarity surcharge and a flat-rate church tax (§ 40 (2) EStG).
This flat-rate taxation is generally exempt from social security contributions. In this regard, the Federal Social Court (BSG) recently ruled that a company event exceeding the 110-euro exemption threshold constitutes compensation in the month of the event and, therefore, the employer must apply the flat-rate taxation to the excess amount in that month. In this case, the excess amount is also exempt from social security contributions. If the flat-rate taxation takes place later, however, the amount would be considered remuneration subject to social security contributions, even if these amounts are effectively subject to flat-rate taxation. However, the umbrella organizations of the social insurance associations decided in 2015 that the aforementioned social insurance obligation does not arise until after February 28 of the year following the event. This approach was confirmed by the aforementioned ruling. As a result, in the case of lump-sum taxation, it is essential to ensure that the lump-sum taxation is carried out in a timely manner in order to maintain exemption from social security contributions.
According to the wording of the law, the 110-euro exemption applies to “benefits provided by the employer to its employees and their accompanying persons.” Benefits for accompanying persons are therefore to be attributed to the employee who brought the person along. In this regard, additional record-keeping is necessary to determine who attended alone or accompanied by persons who must be reported.
According to the text of the law, the 110-euro tax-exempt allowance applies to “benefits provided by an employer to its employees and their accompanying persons.”
An event does not qualify as a company event if it is held to honor a single employee celebrating an anniversary or a single employee, for example, upon their departure from the company. Even if other employees attend, the event does not qualify as a company event. However, for non-cash benefits provided on such occasions, an exemption limit of 110 euros per participant applies. A key distinction between an exemption limit and a tax-free allowance is that, with an exemption limit, any expenses exceeding the limit completely negate the tax exemption, whereas with a tax-free allowance, only the expenses exceeding the allowance are subject to tax.
For value-added tax (VAT) purposes, all expenses, including the VAT they contain, are considered benefits provided as part of the company event. Input tax deduction is generally possible provided that the costs per employee do not exceed the 110-euro limit. If this limit is exceeded, the event is considered to be primarily in the employees’ interest, which may restrict or preclude the input tax deduction. While an exemption generally applies for income tax purposes, the VAT treatment involves a threshold; this means that if the total threshold is exceeded, no further tax benefits apply.
For an event to be recognized as a company event, it must be open to all employees or to a clearly defined group (e.g., a department). Individual groups, such as management only, must not be given preferential treatment. In addition to traditional benefits in kind such as food and beverages, eligible benefits also include admission tickets, as well as costs covered by the employer for venue rental, lighting, hiring an event manager, transportation, lodging, bands, and, finally, tips for staff. A detailed calculation is therefore necessary, on the one hand, to ensure compliance with the income tax exemption limit or the value-added tax exemption limit of 110 euros, and, on the other hand, to apply correct (and timely!) flat-rate taxation. In addition, there are other nuances to consider. For example, if registered guests fail to show up, this could cause the 110-euro threshold to be exceeded for the participating employees, thereby triggering income tax liability or preventing an input tax deduction.
