Be careful when selling company cars

When selling company cars, there are tax and legal pitfalls that can prove costly for companies. Here's what companies should be aware of.

Reliable company cars are indispensable for many companies. After the six-year depreciation period has expired, most companies therefore decide to purchase a new vehicle and sell the old one. However, tax and legal aspects are often overlooked when selling. Selling company cars requires just as much foresight as purchasing them, emphasizes Stephanie Thomas, attorney and tax advisor at Business law firm WWS from Mönchengladbach. "Otherwise, companies run the risk of incurring unforeseen additional costs."
If the company car is part of the business assets, the tax authorities will ask for your money.

The proceeds from the old company car are often used to finance the new one. Those who are clever about it sell the car for a sum significantly higher than its book value. "However, if the company car is considered business assets, the tax authorities will demand a large sum from the sale," emphasizes Stephanie Thomas. "Any private use and its prior taxation are disregarded. The difference between the book value and the selling price is profit and, as such, is fully taxable." According to a ruling by the Federal Fiscal Court (BFH), it also plays no role for tax purposes if the car could only be partially depreciated due to private reasons (BFH, Ref. No. XR 14/12).

Calculate taxes before selling

For example, if a limited liability company (GmbH) sells its company car for €13.000 net, which has a residual book value of €6.000, it makes a profit of €7.000. This would then result in approximately €2.100 in corporate and trade tax plus €2.470 in sales tax. If companies factor in the tax from the outset, they can avoid unpleasant surprises, warns tax advisor Thomas. Companies need to be careful not only with sales prices above book value. If entrepreneurs sell a company car to a shareholder at book value or even below, the tax office will quickly question the appropriateness of the purchase price, Stephanie Thomas points out. "Companies should therefore always obtain an expert opinion to be on the safe side, in order to more easily refute any reservations raised by tax officials."
Private assets or company assets?

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• A company car only automatically becomes part of the company's assets if the car is used for business purposes more than 50 percent of the time.
• If the business use is less than ten percent, it is always considered private property and a sale is not subject to tax.
• Anyone who uses a company car for business purposes between ten and a maximum of 50 percent can choose to allocate it entirely to business assets or to private assets.

"If the car is classified as private assets, the company should carefully document the business trips," explains the tax advisor. "This will dispel any suspicions on the part of the tax office that the car is used for business purposes more than 50 percent of the time." Alternatively, the company car can also be declared entirely as business assets. In this case, it should be examined on a case-by-case basis which treatment is more favorable overall from a tax perspective.

Be careful when selling to private individuals

Sales tax liability is a risk even if companies were unable to claim input tax deduction upon purchase. One solution is the so-called "withdrawal-sale model." Business owners can initially withdraw the car from their business assets and transfer it to their private assets. No sales tax is then due on a subsequent sale. But be careful: The withdrawal must be documented in a legally binding manner. "Companies should immediately record the withdrawal and document the date in writing in their accounting," advises the expert.

Attention warranty obligation

Caution is advised when selling a company car to a private individual. In this case, the company is subject to statutory warranty obligations. For two years, sellers are responsible for all defects beyond normal wear and tear – provided the defect was already present at the time of handover. "Companies cannot contractually exclude a warranty when selling to private individuals," Thomas emphasizes. "Anyone who sells their vehicle to another company – such as a car dealer – can agree to a warranty exclusion." 

And finally ... Selling company cars requires careful consideration. Companies should discuss the tax and legal implications with their advisors early on to avoid potential pitfalls.