Effective use of a company car for private purposes

Many employers allow their employees to use company vehicles for private purposes. Not only will they save employees transportation costs, but they will also support their work performance and effectively expand the package of employee benefits in their company. At the same time, they optimize company costs.

Employee benefits support employee loyalty and satisfaction, improve their work performance and strengthen the company's name on the market. One of the benefits that attracts many employees is the use of a company car for private purposes. The trip to work, to the store or to the doctor can significantly improve the quality of life of an employee thanks to the use of a company car. How does this benefit work in practice?  

How is the tax on the use of a car for private purposes calculated

When providing a car for private purposes, the employee receives non-monetary income that is subject to taxation. In the first year after the vehicle is put into use, the employee's non-monetary income is set at 1% of the entry price of the car (including VAT). In the second to eighth years, the entry price is reduced by 12,5% ​​annually, which means that the value of the employee's non-monetary income is gradually reduced. In the ninth year and subsequent years, the employee no longer receives any non-monetary income from this benefit, which means another benefit for him.

Example from practice:

Let's imagine that the company put a car into use in February 2023 with a purchase price of €10 without VAT (€150 including VAT). The vehicle has been assigned to an employee who can use it for business and private purposes. The employee's non-monetary income is calculated as follows:

• First year (2023): Non-monetary income is calculated as 1% of the entry price, or €121,50 per month.
• Second year (2024): The price of the vehicle is reduced by 12,5%, which brings its price down to €10, and the non-monetary income is therefore €631,25 per month.
• Third year (2025): After a further reduction of the entry price by 12,5%, the employee's non-monetary income is €91,13 per month.

This model continues until the eighth year, when the employee's non-monetary income is minimal (€15,19 per month), and after the eighth year, the employee no longer receives any non-monetary income.

Situations when non-monetary income from the use of the car does not arise

During the first to eighth year of using a company vehicle for private purposes, situations may arise in which the obligation to tax non-monetary income does not arise. That is, if the car provided to the employee for private trips was not drivable during the calendar month, or if the employer and the employee agreed in the agreement on the use of the vehicle for private purposes that the employee is not entitled to use the company vehicle during his month-long sick leave (PN).

Use of the vehicle for private purposes and VAT

If the employer allows the company car to be used for private purposes as well, the VAT payer can choose from two options on how to proceed when claiming the right to deduct VAT from the use of the car.

1. He can claim VAT deduction rights in full (§ 69 ODS. 2 ZDPH), when the use of a vehicle for a private purpose is considered to be the delivery of a service for consideration.

Example of VAT deduction in full:

The employer procured a car for business purposes and assigned it to the employee with the possibility of using it for private purposes as well. He decided to claim the VAT deduction in full.

• Purchase price of the vehicle without VAT: € 14 400
• VAT 20%: € 2 880
• Total purchase price including VAT: € 17 280

In this case, the employer applies the full deduction of VAT from the purchase price of the vehicle, because it is primarily used for business. In such a case, the employer must pay VAT of €18 per month.

Billing example:

• Monthly tax write-off for VAT: €300 (purchase price of the vehicle €14 / 400 months of depreciation for tax purposes)
• Tax base determined depending on the extent of private use of the car by the employee: e.g. €90 (30% of €300)
• VAT 20% of this amount: €18 per month

• The second option is deduction only that part of VAT that corresponds to the extent of the use of the property for business (§ 49 paragraph 5 ZDPH). The use of a vehicle for private purposes is not taxed, as it is not considered to be the provision of a service for consideration, but the payer is subject to an adjustment of the deducted tax when the scope of use of the property is changed.

Example of proportional deduction of VAT: 

In case the employer knows that the vehicle will be used for private purposes within the scope

30%, only a proportional deduction of VAT will be applied.

• Purchase price of the vehicle without VAT: € 14 400
• Total VAT 20%: € 2 880
  • of which VAT is deductible (70%): € 2 016
  • of which the non-deductible part of VAT (30%): € 864
• Total Cost: 17 280 €

In this case, the employer deducts only 70% of the total VAT, because 30% refers to private use. The proportional VAT deduction takes into account the number of private trips and allows the employer to adapt the VAT deduction to the actual use of the vehicle.

If the scope of use of the vehicle changes every year, the employer can adjust the deducted VAT annually. This flexibility helps to optimize tax obligations and allows more accurate accounting of the actual costs of operating the vehicle.

Benefits for both the employee and the employer

For an employee, a company car represents a significant saving, because he does not have to use his own funds to purchase and operate the vehicle. After the eighth year, no non-monetary income is paid, which increases the attractiveness of this benefit. For an employer, a benefit in the form of a vehicle is a powerful tool for improving employee motivation and loyalty. In addition, in this way the employer can effectively optimize company costs.