Renting out a Car to One's Employee: Is this business?

When an employee buys a car, rents it out to his employer, can this be business? Will input tax be deductible? The Federal Court of Justice decided on this on October 11, 2007 (re V R 77/05 - published on February 6, 2008.


Charlie was employed in a tax firm. In 2002, he bought a car that he rented out to his employer with a written contract for the monthly rent of €190 + VAT. Simultaneously, the contract was supplemented, that the employer entitled the employee a car from the firm. It was further agreed, that Charlie can use the car also for private reasons as an employee. Furthermore, it was agreed that the firm could use this car for other employees. The car was then used as agreed. In his pre-return, Charlie declared his turnover from renting the car and deducting the input tax from the car's purchase. However, the office considered this as a misuse of the right to structure one's situation and denied the deduction (§42 AO).

The tax court ruled in favor of the tax office. But the BFH disagreed with the lower courts and considered the merits of the case for Charlie. An entrepreneur is anybody who pursues a professional and self-determined economic activity (§2 I 1 UStG) - in other words when you work on your own account and risk.

Usually, the differentiation is all the same for the different taxes (income, trade, and value added tax). However, as this case shows the distinction can differ. While taking it from the income tax perspective, the employer's payments for renting the car are considered as a part of the salary (in kind). But this allocation in income tax does not count for VAT, when it comes to the question of self-employed activity in VAT. This is shown in §2 II UStG. This provision determines that any physical act inside the relationship of employment is not considered self-employment.

In this case, Charlie rented on his own account and risk his car to his employer and not on behalf of his employer. Renting the car did not belong to his employee's duties. The rental contract was not bound to the labor contract. The BFH saw no misuse in this construction.


Whenever coming to a situation, that you expect to have a bigger VAT reimbursement then you can reckon that the tax office can become interested in auditing your business.

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