Private Use of a Vehicle When Use Is Prohibited?

Can the tax on the non-monetary benefit resulting from the private use of a company car be avoided by agreeing to a ban on private use?

If an employer provides an employee with a company car free of charge, including for private use, this results in a taxable benefit for the employee that is treated as income. According to established case law, this applies regardless of whether and to what extent the employee actually uses the company car for private purposes.

For external employees, tax is waived if the prohibition on private use is monitored, e.g., if the employee demonstrably leaves the company car on company premises over the weekend and during vacations. Doubts about the seriousness of a declared prohibition on private use always arise when it is imposed on the sole managing director or a family member managing director of a family business, or on a shareholder-managing director. This is because there is a lack of effective control in such cases.

Right of Use vs. Possibility of Use

A similar case involving a lack of monitoring recently reached the Federal Fiscal Court. It concerned the son and de facto managing director of the owner’s company. The tax office assessed taxes on the provision of the car, even though he was contractually prohibited from any private use. The judges did not consider it lawful for the tax authorities to deem the agreed prohibition on use invalid without conducting any further investigation. They accused the lower tax court of failing to adequately clarify the facts of the case. It may only refuse to recognize the prohibition on use if this certainty is based on a logical, rationally comprehensible assessment whose traceable conclusions conform to the laws of logic. The tax judges would have to satisfy themselves of the actual private right of use. They could not infer the possibility of use solely from the lack of monitoring of an agreed-upon prohibition.

Outlook

The ruling may have turned out to be very favorable to the citizen because the company vehicle was an Audi A6 and the son had a Porsche 911 registered in his name. If the employee cannot prove that he has a higher-value vehicle available for private trips, we believe that a prohibition agreement will certainly be given less credence.