Significant pitfalls in the private use of a vehicle by a sole shareholder managing director

The (almost) exclusive business use of the vehicle required for a special depreciation allowance pursuant to § 7g of the German Income

In the case decided by the Münster Regional Tax Court in its ruling of 28 April 2023 (Case No. 10 K 1193/20 K,G,F), a GmbH (limited liability company) had granted its sole shareholder managing director an employment contract entitling him to the provision of an upper mid-range passenger car, which he was not allowed to use for private purposes. He was simultaneously contractually obligated to park the vehicle on the company's premises at the end of the business day. As a result, the GmbH did not record any private use of the company vehicle provided. The tax office, on the other hand, assumed private use for the newly acquired vehicle by the managing director and assessed this as a hidden profit distribution, applying the 1% rule and calculating it at EUR 4,000. However, as this meant that the vehicle was not used (almost) exclusively for business purposes, the tax office did not recognize the special depreciation allowance pursuant to § 7g EStG. The Münster Regional Tax Court took the same view.

The Federal Fiscal Court (Bundesfinanzhof, BFH) has ruled that it is generally accepted that a company vehicle provided by the company to a shareholder-managing director is also used for private purposes. This also applies in the case of a ban on private use if no organizational measures are taken that preclude private use. To the extent that the VI Senate of the Federal Fiscal Court (Bundesfinanzhof, BFH), which is responsible for wage tax issues, assumes that private use of a vehicle does not lead to wages if it is contractually prohibited, the Fiscal Court did not uphold this view here. This is because the prima facie evidence, particularly in the case of the sole shareholder managing director, is supported by the fact that a ban on private use does not have any consequences under company law or employment law due to the absence of a conflict of interests. It cannot therefore be assumed without further ado that the managing director actually complies with the ban.

Moreover, in the case in dispute, the GmbH had not invalidated this prima facie evidence by taking precautionary measures, for example by keeping a logbook or other records. The vehicles to be included in the private assets were also not comparable with the company vehicles in terms of status and value in use due to their lower engine power and lower value and, in addition, were still available to the wife of the managing director. Finally, the GmbH was also unable to provide sufficient evidence of the actual implementation of the agreement, whereby the company vehicle was to be parked on the company premises after the close of business.

Regarding the taxation of the non-cash benefit associated with the transfer of the car, the Fiscal Court therefore confirmed that, in the absence of a transfer agreement, this constituted a hidden profit distribution. However, this is not to be valued on the basis of the 1% rule, as this value under wage tax law (§ 8 (2) sentence 2 EStG) does not apply to the valuation of a hidden profit distribution. Within the scope of an estimate according to arm's length principles, the tax court added a 5% profit markup to the vehicle costs, assumed private use at 50% and determined a fair market value (net) of EUR 4,771. However, in view of the procedural prohibition of reconsideration, the amount of EUR 4,000 used by the tax office remained unchanged and the question of the subsequent consideration of VAT amounts could be left open.

Regarding the taxation of the non-cash benefit associated with the transfer of the car, the Fiscal Court therefore confirmed that, in the absence of a transfer agreement, this constituted a hidden profit distribution. However, this is not to be valued on the basis of the 1% rule, as this value under wage tax law ( § 8 (2) sentence 2 EStG) does not apply to the valuation of a hidden profit distribution. Within the scope of an estimate according to arm's length principles, the tax court added a 5% profit markup to the vehicle costs, assumed private use at 50% and determined a fair market value (net) of EUR 4,771. However, in view of the procedural prohibition of reconsideration, the amount of EUR 4,000 used by the tax office remained unchanged and the question of the subsequent consideration of VAT amounts could be left open.

In addition, the tax court also denied the special depreciation allowance pursuant to § 7g of the German Income Tax Act (EStG) for the vehicle newly acquired by the GmbH, as it was not being used for at least 90% of its business purposes. As a result of the applicable prima facie evidence of private use, the GmbH had not (almost) exclusively provided the vehicle to its managing director for business purposes within the scope of the employment contract, but also privately within the scope of a hidden profit distribution. This does not constitute business use in the sense of § 7g EStG.