Last year, German fleets and private buyers bought 3,252,868 cars, which is 2.6% less than in 2001, but still ensured the country was the largest market in Europe.
It was in 2001 when the German government announced a series of tax changes to stimulate the economy, from reductions in corporation tax to cuts in personal income tax, designed to inject an additional € 8 billion of consumer spending into the market. It was needed after new car sales in 2000 fell 11% from 1999.
The German Government levies various taxes and other charges on motoring, from VAT and excise duties on the purchase of a car to the direct taxation on private use of company cars.
In addition, there are other taxes in Germany that are directly or indirectly related to the use of vehicles, such as fuel tax and road tax for trucks.
A recently implemented ecological tax reform increased duty on fuel by € 0.03 per litre on January 1, 2001, 2002 and 2003.
Cars have to be registered with the local municipality in order to obtain a registration plate. In general the person who acts as economic owner of the car is obliged to register it.
The economic owner of the car can be an individual, a company or a partnership, and need not necessarily be the legal owner of the car.
The economic owner in this sense is the person who bears the costs in connection with running the car and who has the right to use the car. Therefore, lessees are responsible for registering their in lease cars.
The cost of registration depends on the municipality where the car is registered, although this sum should not exceed €100, including the cost of the registration plates.
Cars that are registered in Germany are subject to car tax. In addition, foreign registered cars are subject to German Car Tax if they are run in Germany for a period of one year or more.
The system of taxation for cars is quite complex, with a number of limited exemptions for cars with lower emissions of harmful substances, and altogether there are over 40 different tax rates.
Cars that meet Euro III or Euro IV emissions standards (Directive 98/69/EG) or cars with a low gasoline consumption benefit from a limited exemption on car tax.
Euro III cars registered before January 1, 2001 enjoy a tax exemption of €125, which doubles to €250 for diesel-powered cars.
Euro IV cars registered before January 1, 2005 gain a total tax exemption of €300 that rises to €600 for diesel-powered cars.
Three-litre cars gain a total tax exemption of €500 (no matter what motorization).
The standard German VAT rate is 16% and applies to the purchase of a car itself as well as to various services or goods purchased in connection with the car.
However, certain VAT exemptions are available, such as the exemption granted for the supply of goods and services to diplomatic posts and international organisations. Car insurance is also VAT exempt.
Whether car leasing qualifies as a supply of service or a supply of goods for VAT purposes depends on its treatment for direct tax and accounting purposes (see the accounting treatment section).
If a car is recorded on the balance sheet of a lessor, the lease qualifies as supply of service for VAT purposes.
But if a car is recorded as an asset on the balance sheet of a lessee, the lease qualifies as a supply of goods.
Companies with the right to full input VAT deduction (i.e. not full or partly exempt businesses) can reclaim all VAT invoiced, if they only use a car for business purposes.
If the car is partly driven for private purposes, other regulations apply:
Private use by the taxable person
Private use by employees
Input VAT related to company cars used by employees for both business and private journeys is fully deductible.
However, the private use of a car is deemed to be a free of charge supply of service from the taxable person to its employee. This supply of service is subject to 16% VAT.
The VAT on this private use has to be calculated according to the cost of the private use. There are various mechanisms to calculate this cost for VAT purposes, although the German tax authorities allow a simplified method called the '1%-Regulation'. Businesses generally apply this method to calculate VAT on private use.
The monthly cost for private use for VAT purposes, according to the 1%-Regulation, is calculated as follows:
(1% of the list price of the car (incl. VAT)) + (0.03% of the list price of the car multiplied by the kilometre-distance between an employee's home and office).
The total of these two sums forms the monthly gross-consideration for VAT purposes, i.e. 100/116 of this amount is the monthly net consideration for VAT purposes. The net-consideration is subject to 16% VAT. This VAT has to be paid with the monthly VAT return of the employer.
Costs related to all means of transport from passenger cars to buses and other vehicles are fully deductible for direct tax purposes, although the vehicle must be partly used for business purposes.
The costs are deductible for direct tax purposes, either as depreciation of the asset or as operating expenses. All expenses must be duly supported by the relevant documentation, i.e. invoices and contracts. The deduction is granted regardless of whether the car is purchased or leased.
Cars have to be reported as assets in the balance sheet of the company at their purchase price, and must be depreciated by 16.66% linearly over a six-year period.
A shorter period is not accepted, even if a company expects to keep a car for less than five years.
The value of the private use of a company car by the individual who owns the business or by the partners in a partnership, should not reduce the company's taxable profit. As a result, the company has to increase its profit by the value of the private use of the car.
This value is calculated from the private mileage shown in the driver's logbook, the total annual mileage of the car, and the total car-related costs booked as business expenses.
However, private use can be calculated by a simplified method called the '1%-Regulation'. This 1%-Regulation deems the value of the private use of a company car for one calendar month to be 1% of the list price of the car, including VAT.
This amount has to be increased by the value of non-deductible expenses for the use of the car for commuting between home and office (0.03% of the list price of the car multiplied by the kilometre-distance between home and office).
But the taxable profit of the business is not increased by this value, if an employee of the company drives the car. This type of private use is covered by the driver's personal income tax. Managing directors are considered to be employees in this sense.
In various decrees from the German Ministry of Finance, the German Tax Authorities have regulated the tax and accounting principles for the leasing of movable goods.
For tax and accounting purposes a distinction has to be made between an operating lease and a finance lease.
Lease contracts qualify as a finance lease if the lease contract is concluded for a fixed time and if the lease payments made by the lessee in this fixed time cover at least the acquisition/manufacturing costs and related costs borne by the lessor. Otherwise, the lease qualifies as an operating lease.
For an operating lease where the lessee is obliged to purchase the car at the end of the lease period for a fixed price, if the lessor wants to sell it, the car is recorded as a fixed asset by the lessor. The depreciation is treated as an operating expense in the profit and loss account of the lessor. The lease payments under this type of contract are treated as income in the profit and loss account of the lessor.
Operating lease contracts, others than the one mentioned above, may be treated differently depending on what the parties agreed, especially with regard to the sale of the car at the end of the lease period.
If the lease contract qualifies as a finance lease, the tax and accounting treatments depend on whether the lessee has an option to buy the car or an option to extend the lease period.
Lease without the option to purchase the car or to extend the lease period
If the fixed lease period for the car is at least two years but less than 4.5 years, the car has to be recorded as a fixed asset by the lessor.
If the fixed lease period for the car is less than two years or more than 4.5 years, the car is treated as a fixed asset of the lessee.
Financial lease with the option to purchase the car
The car is treated as a fixed asset of the lessor if the fixed lease period is at least two years and less than 4.5 years. And if the lessee purchases the car, the purchase price must not be less than the depreciated original purchase price of the car.
Therefore, the purchase price has to exceed the value of the car shown in the books of the lessor. If the fixed lease period is less than two years or more than 4.5 years the car has to be recorded as a fixed asset by the lessee.
The car also has to be recorded by the lessee if the lease period is at least two years but less than 4.5 years. And if the lessee purchases the car after the lease period, the purchase price must be less than the depreciated purchase price of the car.
Financial lease contracts with the option to extend the lease period
The car has to be shown in the books of the lessor if the fixed lease period is at least two years but less than 4.5 years, and if the lease payments made in the additional lease period exceed the depreciated purchase price of the car.
The car is treated as an asset of the lessee if the fixed lease period is less than 2 years or more than 4.5 years.
The car also has to be recorded by the lessee if the lease period is at least 2 years but less than 4.5 years and if the lease payments made in the additional lease period do not exceed the depreciated purchase price of the car.
Driver's personal tax
Wage Tax and Social Security Contributions
The private use of a company car by an employee is considered to be a benefit in kind for German income tax purposes. Company managing directors are considered to be employees in this sense. The value of the private use is subject to Wage Tax as well as to Social Security Contributions.
The value of the private use can be calculated based on the driver's logbook of business and private journeys. The total costs of use of the car need to be divided according to the ratio between the business and private kilometres recorded in the driver's logbook.
However, benefit in kind can be calculated through a simplified method called the '1%-Regulation. The monthly cost for private use for VAT purposes, according to the 1%-Regulation, is calculated as follows:
1% of the list price of the car (incl VAT) plus 0.03% of the list price of the car multiplied by the kilometre-distance between an employee's home and office
This sum is considered to be the value of the private use of the company car and is therefore subject to monthly Wage tax and Social Security Contributions.
If an employee commutes between home and the office, this is considered a business expense for the employee, that can therefore be deducted from his taxable income.
A lump-sum amount can be deducted independent of the mean of transport used (i.e. company car, private car, public transport). For each day the deductible amount is calculated as follows:
Whole kilometre-distance between office and home multiplied by €0.36 for the first 10 kilometres. For each additional kilometre covered the mileage amount increases to €0.40.
This amount can be deducted from an employee's personal income tax return as business expense, however the maximum amount is limited to € 5,112. This limitation is not applicable for private cars and company cars.
In addition, if an employee uses his private car for business trips, he can deduct the expenses incurred as business expenses in his personal income tax return.
The deductible amount can be calculated based either on the actual costs incurred or the employee can deduct a mileage amount of €0.30 per kilometre.
An employer can reimburse an employee for using his own car for business journeys up to a maximum of €0.30/km. This reimbursement is not subject to Wage Tax or Social Security Contributions.
However, if an employee is reimbursed by his employer for business journeys, he is only entitled to deduct the excess motoring cost as business expense in his personal income tax return.