Providing electric vehicles to employees – Green Mobility for employers (part 1)

Why should companies implement a Green Mobility strategy?

In this series, we aim to explain the tax implications of green mobility in the context of sustainability reporting under the Corporate Sustainability Reporting Directive (CSRD). Companies that are required to create a sustainability report face the challenge of not only taking on ecological and social responsibility but also presenting this in a transparent manner. Specifically, employers affected by the CSRD are obligated to measure and report the CO2 emissions of their employees, as these are classified as significant Scope 3 greenhouse gas emissions according to the European Sustainability Reporting Standards E1-6. The ESRS provides detailed guidelines for the implementation of the CSRD. While meeting legal requirements is essential, a well-crafted sustainability strategy offers far-reaching advantages. It strengthens the employer’s brand, enhances employee retention and positions the company as an attractive and forward-thinking workplace. Moreover, the targeted integration of green mobility solutions can lead to significant tax and social security benefits.

As a general principle, mobility allowances - whether provided as benefits in kind or monetary contributions - are typically subject to income tax, Value-Added Tax (VAT) and social security contributions. However, in the realm of sustainable mobility, numerous preferential treatments are available. We are going to demonstrate how companies can not only contribute to the reduction of CO₂ emissions through specific initiatives but also optimise their fiscal burden while fostering a modern, environmentally conscious work environment.

Electric vehicles

(Hybrid) electric vehicles are becoming an increasingly popular and environmentally friendly alternative to traditional combustion engine cars. Contributing factors include the government-supported expansion of charging infrastructure and the environmental bonus (Umweltbonus) that was available until 2023. In addition to their ecological benefits, electric vehicles offer significant tax advantages.

Electric vehicles to employees

In the context of employee mobility, the provision of company cars for both business and private use is of particular practical importance. However, due to numerous legal complexities, this topic is frequently a point of contention during tax audits. The relevant legal framework is outlined in Section 8 para. 2 sent. 2 et seq. in conjunction with Section 6 para. 1 no. 4, sent. 2 et seq. of the German Income Tax Act (EStG), and further clarified by the Federal Ministry of Finance’s guidance dated March 3, 2022 [IV C 5 – S 2334/21/10004 :001], concerning the wage tax treatment of company vehicles provided to employees.

1. Income tax / wage tax

Providing electric vehicles to employees is currently highly advantageous from a wage tax perspective, as the legislator has significantly reduced the taxable basis for electric cars. The starting point for taxation of company cars is the so-called 1% method. For fully electric vehicles, this taxable amount is now lowered to only 0.25% of the gross list price (GLP), rounded down to €100, at the time of the first registration. The GLP refers to the manufacturer’s recommended retail price, not the actual purchase price. This reduced rate applies until at least December 31, 2030, for all electric vehicles with a maximum GLP of €70,000. A planned increase of this threshold to €100,000 is outlined in the coalition agreement between the CDU/CSU and the SPD.

Even with more expensive electric vehicles and certain plug-in hybrids, it is possible to achieve wage tax savings compared to combustion engine vehicles. For these vehicles, the basis for tax assessment is only 0.5% of the gross list price (GLP). For plug-in hybrids, the requirements include a maximum CO₂ emission of 50 grams per kilometre and, effective January 1, 2025, a minimum all-electric range of 80 km.

If an employee is permitted to use the company car for commuting between home and their primary workplace an additional mileage-based tax applies. For combustion engine vehicles, the taxable basis increases by 0.03% of the GLP per kilometre of the one-way commute between the employee’s home and workplace, as per Section 8 para. 2 sent. 3 EStG. For electric vehicles only one-quarter and for plug-in hybrids half of that rate apply.

Example:

An employee is allowed to use a car with a GLP of €40,000 for all private trips. The employee’s personal income tax rate is 30%, and the one-way commute is 10 km. Social security contributions, which reduce taxable income, are assumed to be 20% of the taxable basis. The resulting wage tax will differ depending on the vehicle type:

For vehicles with combustion engines, the regular 1% method results in the taxation of 60% of the gross list price (GLP) as private use over a period of five years. For subsidised vehicles, this is reduced to only 30% or 15%.

An alternative to the 1% method is the less favoured, more complex, and error-prone logbook method, where all trips must be recorded (Section 8 para. 2 sent. 4 EStG). Private journeys are then calculated as a proportion of the total number of trips and multiplied by the vehicle costs. In this case, for fully electric vehicles, the taxable basis is only one-quarter of what it would be for a combustion engine car. For plug-in hybrids and electric vehicles with a GLP over €70,000, the taxable basis is half.

Note: Special provisions apply to employees with dual household arrangements.

2. VAT

In the context of German VAT law, which is strongly influenced by the VAT directive of the EU, the 0.25% and 0.5% rules do not apply due to systematic reasons. Instead, the regular taxable basis, as outlined in Section 10 para. 1 sent. 1, para. 2 sent. 2 of the German VAT Act (UStG), applies, compare Section 15.23 para 10 of the German VAT Application Decree (UStAE). However, for simplification purposes, the values used for wage tax purposes (excluding the electric vehicle benefit) are accepted, as per Section 15.23 para. 11 UStAE. Thus, the gross value is calculated according to the 1% method and includes an additional surcharge for commuting from home to the primary workplace.

Based on the example above, the calculation is as follows:

3. Social Security Law

The contribution assessment follows the same pattern as income tax, derived from Section 14 para. 1 sent. 1 of the German Social Code IV (SGB IV) in conjunction with Section 1 para. 1 sent. 1 no. 1 of the Social Security Contribution Regulation (SvEV). In our example, the contribution base is therefore €400 for combustion engine vehicles, €200 for hybrids, and only €100 for fully electric vehicles. The calculation is as follows:

In general, both the employer and the employee each pay half of the social security contributions. Therefore, the savings potential through the electric vehicle rule can be as high as 75% compared to combustion engine vehicles for both parties. It is important to note that the majority of employee contributions, as per Section 39 para. 2 sent. 5 no. 3 EStG, reduce the taxable basis for wage tax.

4. Conclusion

Providing an employee with an electric vehicle for private use presents an opportunity for significant annual savings, potentially reaching four figures when factoring in taxes and social security contributions.

However, this is just the tip of the iceberg. In our next article, we will explore additional opportunities to implement a tax-optimised and sustainable mobility concept using electric vehicles. Some of these possibilities may even be realised in combination with the provision of company cars.

A special thank you goes out to our intern, Clara Schoebel, for her valuable support in the preparation of this article.