There is a heated argument about the abolition of the company car privilege. The arguments for and against the status quo are diverse and by no means new. But what exactly does the “privilege” consist of and what consequences would its abolition have for the contractual relationships between employers and their employees?

Company cars are the employer’s own or mostly leased cars, which the employees may (also) use privately. Be it the small car that the nurse uses to go shopping and drive home after the work is done, or the representative limousine of the manager.

For the employees, the possibility of private use acts like an additional salary component on which taxes and social security contributions are incurred. Therefore, the pecuniary benefit from the possibility of use must be evaluated. The 1 percent method was introduced in 1996 to simplify this for the wage tax mass procedure.

Ines Otte and Andreas Eckhardt are experts in advising on wage tax and employment law at the auditing and consulting company Mazars in Germany. dr As a lawyer, Andreas Eckhardt specializes in employment law advice. Ines Otte as a lawyer and tax consultant, among other things, on wage tax advice.

For the private use of a company car, an amount of 1 percent of the gross list price of the specific vehicle is taxable each month. There may also be a surcharge if the car is also used for trips to and from work. This is a roughly generalized valuation rule that is not actually intended to be a tax subsidy, but is only intended to make the work of the tax offices easier.

In practice, however, this regulation often represents a subsidy because the actual benefit of use is many times higher. This is especially true if the car is used privately a lot; especially when the employer also pays the fuel costs. Then it may be that the flat rate of 1 percent of the gross list price for tax purposes leads to a considerable tax advantage compared to the saved costs for a private vehicle.

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Various company car leasing models that promise optimal use of tax advantages are based on this mechanism. Typically, the decision in favor of the “company car” remuneration component is only made when it pays off, above all from a tax point of view.

But what happens if this calculation no longer works out as a result of the company car privilege being abolished because private use will be evaluated differently in the future and ultimately taxed more? At whose expense would this be? Can employees then do without the company car in order to avoid a higher tax burden or – even better – can they demand compensation from the employer or insist on being financially in the same position as before? What then happens to existing company car regulations and fleet guidelines that are regularly based on the tax 1 percent method?

Unfortunately, there are no simple, general answers. As almost always, the typical lawyer’s answer is: It depends, namely on the specific circumstances of the individual case.

The first thing to do is to take a look at the specific company car agreement or guideline. If the parties were forward-looking, they regulated something about possible changes by the tax legislator. Then the situation is clear.

In many cases, however, there are no explicit regulations on possible changes to the law. Frequently, it will simply be stipulated that the 1 percent method applies “currently”. Then the interpretation of the agreement made decides. Only in exceptional cases will a company car agreement be interpreted in such a way that the employer promises the employees the “tax advantage” and compensates for future disadvantages from changes in the law. In practice, an interpretation of the contract will therefore regularly lead to higher wage tax burdens falling within the risk sphere of the employees and affecting them directly.

The answer to the questions as to whether employees can get out of a company car agreement that is no longer lucrative from a tax point of view or whether they are entitled to an adjustment of the agreement will always be “no”. Only in special circumstances will the question arise as to whether the cessation of the company car privilege can be a serious, unreasonable change in the basis of the business, which will force the contract to be adjusted. It will have to be taken into account that the possibility of private use remains objectively advantageous for the employees and that they owe the resulting income tax to the tax office – as with other remuneration components. The employer is only responsible for processing. Finally, the interests of the employer must also be taken into account, in particular to what extent it is bound to existing leasing contracts.

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Conclusion: The company car as a salary component will continue to lose its attractiveness. In times of a shortage of skilled workers, some employers will also regret this. However, the loss of the company car privilege will primarily affect employees who are not entitled to compensation from their employer. However, the parties to the employment contract are free to reach amicable, balancing agreements. As is usually the case in life, this is usually the best solution in an employment relationship. A large number of labor law regulations will certainly have to be reviewed and at least formally adapted.