Company cars: tax benefits cause multi-billion-euro social and environmental misalignment

The taxation of company cars is increasingly causing a social and environmental misalignment in German transport policy, according to a study by think tank Agora Verkehrswende and the Oeko-Institut. The tax benefits provided for the private use of company-registered vehicles cost the government an estimated three to six billion euros per year – and the figure is increasing.

Around half of the money goes to the 20 per cent of households with the highest incomes, while households in the lower half of the income table receive only around one-fifth of the benefits. The company cars funded under the scheme have a particularly harmful climate impact as they tend to have a far greater power output (160 HP) than privately registered vehicles (115 HP), as well as twice the annual mileage (approximately 30,000 km/year). And according to the study, no environmental steering effect can be detected despite the introduction of additional benefits for fully electric and hybrid vehicles. Fully electric cars accounted for just 8 per cent of new registrations of company vehicles in the first six months of 2021 – 50 per cent lower than new private registrations.

Towards a more social, eco-friendly tax policy

“A reform of company car taxation is overdue,” says Christian Hochfeld, Agora Verkehrswende’s Executive Director. “A bit of ecological window dressing is not enough: this anti-social, climate-damaging regime needs a complete overhaul. First and foremost, that means ending all privileges for company cars with combustion engines. Whether I drive to work in my own car or my employer’s should have no bearing on my tax position. Building on this principle of tax neutrality, the German government could provide temporary incentives for the purchase and use of company cars with demonstrably low emissions.”

“The current rules do not come close to reflecting the real financial benefits,” says Konstantin Kreye from the Oeko-Institut. “What’s more, the cars often come with a company fuel card, which operates as a flat rate: in effect, the more I drive, the more I save. Employers can use the provision of a high-value company car as leverage in wage negotiations; as a result, the majority of higher-earning employees are provided with a bigger car than they would purchase for themselves. And on top of that, the employer generally covers all the running costs, making travel much cheaper than if the employee used their own car or public transport.”

Company cars are particularly carbon-intensive

According to the Agora Verkehrswende/Oeko-Institut study, company car taxation is one of the main drivers of Germany’s exceptionally high average emissions from newly registered business vehicles compared to other EU member states: the figure of 140 g/CO2 per kilometre (2020) is much higher than in the Netherlands, the frontrunner, where new cars emit 98 g/CO2 on average.

For employers and their staff in Germany, purchasing high-cost vehicles – which tend to be large and emissions-intensive – pays off because they offer the greatest tax benefits, based on the deductibility of purchase costs and input tax, compared with privately owned cars. Relatively few fully electric models are currently available in the higher vehicle segments, however, so plug-in hybrids are chosen instead. But in the absence of specific in-company rules, there is no incentive to drive these vehicles in electric mode.

These misdirected incentives in the procurement of company cars then impact on the car fleet as a whole, since two out of three newly registered cars in Germany are business-owned. After just two to four years, these company vehicles are placed on the used car market and stay on the road, with private owners, for a considerable number of years.

Company cars mainly benefit high earners

A glance at the allocation and use of company cars underlines the negative impacts of current tax law. Company cars are mainly provided for high-earning males in the 40-60 age group. In all, around 50 per cent of company cars are provided for and driven by employees with a gross monthly income of 5,000 euros or more. Most of the vehicles have a large power output, mainly because the tax is generally calculated on a flat-rate basis using the list price. Many employers also cover fuel costs, as not only the purchase but also the running costs are tax-deductible. Ultimately, the employers’ savings on wage costs generally exceed their investment in the company car.

Differentiation according to CO2 emissions

The social and environmental misalignment in company car taxation is particularly marked in Germany. The United Kingdom and Belgium, for example, differentiate on the basis of the CO2 emissions when calculating the financial benefit of a company car. The higher the emissions, the higher the employee’s tax liability. One option, then, is to limit the employer’s scope to write off the vehicle costs against tax by making this dependent on the car’s CO2 emissions. Another option is to impose a carbon emissions levy on the car’s purchase price, to be collected via vehicle tax. In addition, companies can introduce their own in-house rules with the aim of incentivising more sustainable mobility.

compan-e: project for sustainable corporate mobility

The study shows why company cars are relevant to climate change mitigation, how they offer tax privileges and why these tax rules are problematical in terms of environmental and social justice. It concludes with an overview of reform options. The focus is on employees’ private use of company cars, as this offers the most substantial tax privileges. However, in some cases, the private use of a company vehicle may be an attractive option, from a tax perspective, for the self-employed and tradespersons as well.

Agora Verkehrswende and the Oeko-Institut produced the study as part of the compan-e project. The aim of the project, which is managed by the Oeko-Institut, is to highlight pathways towards electric and sustainable corporate mobility. In addition to Agora Verkehrswende and the Oeko-Institut, other project partners include the business initiative Foundation 2° and transport, energy, facility management, insurance and communication sector companies. The project is funded by the Federal Ministry for the Environment, Nature Conservation and Nuclear Safety (BMU).

The study, entitled Dienstwagen auf Abwegen. Warum die aktuellen steuerlichen Regelungen einen sozial gerechten Klimaschutz im Pkw-Verkehr ausbremsen, and further information about the project are available online: https://www.compan-e.de/.

Study: Dienstwagen auf Abwegen. Warum die aktuellen steuerlichen Regelungen einen sozial gerechten Klimaschutz im Pkw-Verkehr ausbremsen (= Company cars on the wrong track: why the current tax regime puts the brakes on socially just climate action in the passenger car sector). Available for download on the Oeko-Institut website.