The private use of a company vehicle can have significant tax consequences. This is illustrated by the decision of the Niedersächsisches Finanzgericht (Lower Saxony Fiscal Court; FG Niedersachsen, decision of 21 January 2026 – 3 K 78/24). The court held that an employee’s incorrect statements regarding commuting distance constituted intentional income tax evasion and therefore found that the tax assessment period had been extended to ten years.
Private use of a company car is taxable
If a company car is also used for private purposes, the resulting benefit must be recognised for tax purposes. For employees and shareholder-managing directors, this generally constitutes a benefit in kind. Sole traders and partners in a partnership, particularly an OHG or KG, on the other hand, recognise private use as a withdrawal of use.
There are generally two possible valuation methods:
- Under the logbook method, taxation is based on the documented business and private journeys.
- Under the flat-rate valuation method, the benefit derived from use is determined in accordance with the so-called 1% rule.
Two components of the flat-rate valuation
The 1% rule consists of two amounts. For private use, 1% per month of the vehicle’s domestic gross list price at the time of its initial registration is generally applied. For certain electric vehicles, the applicable rate may be reduced to 0.25% or 0.5%.
In addition, there is the benefit relating to journeys between the employee’s home and first place of work. This amount is generally calculated by multiplying the gross list price by 0.03% and by the number of kilometres of commuting distance. The one-way distance is decisive. The corresponding amount is also subject to VAT.
Incorrect commuting distance resulted in an extended assessment period
The claimant in the proceedings held a degree in business administration and was employed as a sales director. His employer provided him with a company car that he was also permitted to use privately. The actual distance between his primary residence and his place of work was 99 kilometres.
However, the claimant informed his employer that the distance was only 22 kilometres. In doing so, he referred to a secondary residence registered at his sister’s address. On this basis, the employer calculated the private-use portion, declared the payroll tax and paid it to the tax authorities.
In his income tax returns, the claimant adopted the payroll data that the Fiscal Court considered incorrect without including an explanatory note. At the same time, he claimed up to 222 journeys per year of 99 kilometres each for the commuter tax allowance. In the subsequent proceedings, the tax authorities ultimately assumed that 120 journeys had been made.
Findings from the external payroll tax audit
During an external payroll tax audit, doubts arose regarding the stated distances. The tax investigation unit was subsequently called in to examine the matter. The claimant admitted that he had travelled from his primary residence, located 99 kilometres from his place of work, more frequently than he had declared.
The parties reached an agreement regarding the actual private-use portion. In 2023, the Finanzamt (German tax office) subsequently issued amended income tax assessment notices for the 2009 to 2014 assessment periods. The claimant argued that the standard assessment periods had already expired.
Fiscal Court finds intentional tax evasion
The Niedersächsisches Finanzgericht dismissed the action as unfounded. According to its decision, the Finanzamt was entitled to amend the final tax assessments on the basis of new facts pursuant to § 173 Abs. 1 Nr. 1 Abgabenordnung (German Fiscal Code).
The tax authorities had not previously been aware of the actual number of journeys from the primary residence to the place of work. They could not have identified this fact from the tax returns. The court also found no failure on the part of the Finanzamt to investigate, as the returns appeared internally consistent and had been prepared with the assistance of a tax adviser.
Ten years instead of four
For income tax, the standard assessment period is generally four years. Where tax has been evaded, the period is extended to ten years pursuant to § 169 Abs. 2 Satz 2 Abgabenordnung.
In the Fiscal Court’s view, both the objective and subjective elements of tax evasion under § 370 Abs. 1 Nr. 1 Abgabenordnung were satisfied. The claimant had made incorrect declarations concerning material tax facts by transferring the erroneous information from his payslips to his income tax returns without correcting it.
The court also found that the claimant had acted intentionally. Conditional intent may be established if the taxpayer considers an understatement of tax to be possible and accepts that risk. According to the decision, relevant factors may include the taxpayer’s educational background, many years of experience with the taxation of the company car and the information contained in the payslips. The absence of a clarifying note in the tax returns was also taken into account in the court’s assessment.
The judgment of 21 January 2026 is final. It is also not known whether separate criminal proceedings were brought in addition to the consequences under tax procedure law; the presumption of innocence would apply to any such proceedings.
Correction of incorrect tax information
Incorrect mileage information may be identified particularly during an external tax audit or payroll tax audit. Subject to the statutory requirements, a correction may exempt the taxpayer from criminal liability. In particular, this requires that the offence has not yet been discovered and that all matters not yet time-barred are corrected in full.
The evaded taxes and the interest accrued on them must be paid within the applicable deadlines. A correction that is only partial or limited to individual assessment periods is insufficient to obtain the intended exemption from criminal liability if other matters that are not yet time-barred are also affected.
Employer liability risks
Incorrect distance information may also have consequences for employers. If insufficient payroll tax is withheld and paid due to incorrect information, the employer may incur liability.
The information provided by the employee forms the basis for the payroll tax treatment of the benefit derived from use. Whether and to what extent the employer was entitled to rely on this information depends on the circumstances of the individual case. A written declaration by the employee can document the distance used as the basis for the calculation but does not automatically resolve potential tax liability issues.
Tax implications may affect several types of tax
Stating an excessively low distance initially reduces the benefit in kind recognised each month. However, if the discrepancy is identified at a later stage, several financial liabilities may arise concurrently:
- The Finanzamt may demand payment of the underpaid income tax or payroll tax.
- In the event of intentional tax evasion, the ten-year assessment period may apply.
- Interest on evaded taxes may also be charged.
- Additional VAT liabilities may also arise.
- The employer may be held liable for payroll tax that was not duly paid.
The taxation of company cars used for private purposes depends on the specific circumstances of their use, the valuation method selected and the declarations made to the employer and the tax authorities. MTR Legal assists companies, members of corporate bodies and private individuals in assessing such matters as part of its tax law advisory services.
