How are company cars taxed in Germany?
Company cars represent a significant benefit for employees in Germany, but they also create a tax liability when used for private purposes. The German tax authorities treat private use of a company vehicle as a monetary benefit that must be taxed as part of the employee’s income. Business owners and executives relocating to Germany need to understand how this taxation works, as the choice between the two available calculation methods can substantially affect their net income and administrative workload.
The company car taxation in Germany
When an employer provides a vehicle that an employee may use for private journeys, the German tax code classifies this as a benefit in kind (in German: “geldwerter Vorteil”). This benefit increases the employee’s taxable income, which means both income tax and social security contributions rise accordingly. The taxable amount does not depend on how much the employee actually drives privately. Instead, German tax law offers two distinct methods to calculate this benefit: the flat-rate method based on the vehicle’s list price, or the detailed logbook method that tracks actual usage.
The taxation applies only to vehicles that are available for private use. Pure commercial vehicles such as panel vans without rear windows or seats, delivery trucks, or vehicles that are demonstrably restricted to business use only do not trigger this taxation. The key criterion is whether the vehicle could reasonably be used for private purposes such as weekend trips, shopping, or holiday travel. In practice, most passenger cars and SUVs provided by employers fall under this rule.
Distinguishes Germany from some neighbouring countries that company cars carry no external marking. In Denmark, for example, company vehicles must display yellow number plates, making them immediately recognisable. In Germany, company cars look identical to privately owned vehicles.
The 1%-Rule for calculating company car taxation
The 1%-Rule (in German: 1%-Regelung) represents the simpler and more commonly used method. Each month, 1% of the vehicle’s gross list price when new is added to the employee’s taxable income. This calculation uses the manufacturer’s recommended retail price in Germany at the time the vehicle was first registered, rounded down to the nearest hundred euros. The list price includes value-added tax and all standard equipment that came with the vehicle when it was first sold.
For employees who use the company car to commute to their regular workplace, an additional amount must be added. This supplement equals 0.03% of the gross list price for each kilometre of distance between home and workplace, calculated monthly. If the employee commutes to the office fewer than 15 days per month on average, this rate reduces to 0.002% per kilometre. These amounts are then added to the base one per cent and subjected to income tax and social security contributions.
The 1%-Rule offers simplicity and predictability. Employees and employers know exactly what the taxable benefit will be each month, regardless of actual private mileage. No documentation of individual journeys is required. However, this method can result in higher taxation if the employee uses the vehicle very little for private purposes. Someone who drives a car worth 50,000 EUR would face a monthly taxable benefit of 500 EUR, which translates to additional income tax and social contributions on 6,000 EUR per year, even if they barely use the vehicle privately.
Reduced tax rates for electric and low-emission company cars
German tax policy has introduced reduced rates for electric vehicles and plug-in hybrids to encourage environmentally friendly company car choices. For fully electric vehicles (battery electric vehicles), the taxable benefit can be calculated using 0.25 EUR of the list price per month instead of 1%, provided the vehicle was first registered between 1 January 2019 and 31 December 2030 and has a list price of no more than 70,000 EUR. For electric vehicles exceeding this price threshold, or for plug-in hybrids meeting specific emission and electric range requirements, the rate is 0.5%.
These reduced rates applied more generously in previous years. Between 2020 and 2022, the 0.5% rule covered a broader range of vehicles, and the 0.25% rate had a higher price threshold. The current rules reflect adjustments made as electric vehicle adoption increased and as the government refined its incentive structure. If you wish to purchase a new car for yourself as a managing director, shareholder or for your employees, you should calculate the different taxation options in advance.
The reduced rates apply to the base calculation only. The supplement for commuting to work (0.03% or 0.002% per kilometre) must still use the full list price, not the reduced calculation base. This means the environmental benefit primarily affects the base private use component, not the commuting component.
The logbook method for company cars in Germany
The logbook method (Fahrtenbuchmethode) offers an alternative for employees who use their company car predominantly for business purposes. With this approach, the employee must maintain a detailed logbook documenting every single journey throughout the entire year. Each entry must record the date, destination, purpose, route, and distance of the trip. The logbook must be maintained continuously and contemporaneously—retroactive entries are not accepted by tax authorities.
At the end of the year, the total private kilometres are divided by the total kilometres driven, producing a private use percentage. This percentage is then applied to the total actual costs of operating the vehicle. These costs include fuel, insurance, maintenance, repairs, vehicle tax, depreciation, and interest on financing if applicable. The resulting amount represents the taxable benefit for private use.
The logbook method typically results in lower taxation when private use is genuinely minimal or the value of the car is high, for example if you want to use a Porsche as your company car. An executive who drives 40,000 kilometres per year for business and only 5,000 kilometres privately would pay tax on roughly 11% of the vehicle’s operating costs, which often proves more favourable than the flat 1%-Rule. However, this method requires meticulous record-keeping throughout the year. Tax authorities scrutinise logbooks carefully during audits, and any gaps or inconsistencies can lead to rejection of the method, forcing a retroactive application of the one per cent rule with potential penalties.
Practical considerations when choosing between calculation methods
The choice between the 1%-Rule and the logbook method depends on individual circumstances and preferences. The 1%-Rule suits employees who value simplicity and predictability, or who use their company car regularly for private purposes. The logbook method benefits those with low private mileage or for cars with a higher value if you are willing to maintain detailed records.
Employers often prefer the 1%-Rule rule, because it reduces administrative complexity. Some companies explicitly prohibit the logbook method in their company car policies to avoid the additional oversight and audit risks. Employees considering the logbook method should confirm their employer permits this approach and should honestly assess whether they will maintain the required discipline to document every journey throughout the year.
| Method | Calculation basis | Documentation required | Typical advantage |
|---|---|---|---|
| One per cent rule | 1% of gross list price monthly | None | Simplicity, no record-keeping |
| Logbook method | Actual costs × private use percentage | Complete journey logbook | Lower tax when private use is minimal |
It is worth noting that once an employee chooses a method for a given tax year, they generally must continue with that method for the entire year. Switching between methods from month to month is not permitted. Planning at the start of each year is therefore important for anyone considering the logbook approach.
What do managing directors and shareholders need to bear in mind with regard to tax when it comes to their company cars?
Company owners and managing directors face the same taxation rules for company cars as regular employees. However, their situation often differs in practice, because they typically have greater flexibility in how they structure their compensation and benefits. A managing director of a GmbH or a UG who is also a shareholder must still treat private use of a company vehicle as a taxable benefit, but they may have more influence over vehicle selection and usage policies.
For shareholders who hold more than 50% of a company, tax authorities may scrutinise company car arrangements more closely, particularly if expensive vehicles are involved. The authorities want to ensure that the benefit is properly declared and taxed. In some cases, they may challenge logbook entries if they appear unrealistic given the shareholder’s role and responsibilities.
As a rule, vehicles up to the price of a Porsche are generally accepted, provided that the company generates sufficient turnover to justify the value of the car. However, cars that are more expensive than a Porsche often end up in court, which must decide whether they can still be recognised as company cars. Another important point is that managing directors must have explicit mention in their employment contract that they are entitled to a company car. It is best to even note the maximum value of the car or its value class in the contract.
Company owners should also consider the broader tax implications of company cars. While the employee pays income tax on the benefit, the company can typically deduct the full costs of the vehicle as business expenses, including depreciation, fuel, insurance, and maintenance. This creates a tax-efficient overall structure, though the personal taxation of the benefit partially offsets this advantage. Careful calculation is needed to determine whether a company car truly offers a financial benefit compared to a higher salary that the employee then uses to lease or purchase a private vehicle.
The contents of this blog post have been compiled with the utmost care. However, they are exclusively general information and do not constitute tax or legal advice. The contents presented do not replace individual advice from qualified tax advisors, solicitors or other experts.
Despite careful review of the content, no guarantee is given for its accuracy, completeness or timeliness. Any liability for damages arising directly or indirectly from the use of or reliance on the information is excluded.
Legal regulations are subject to change, and individual circumstances may lead to different results. Before making any decisions based on the information provided here, please seek expert advice.