Company car after termination – When do you have to return it?

A company car is often more than just a work tool. For many employees it replaces a private car and is an important part of their overall remuneration. Once a termination is issued, the same question comes up every time: Can you keep using the car during the notice period? When exactly must it be returned? And is it possible to buy the car or offset it against a severance payment? This guide explains the legal rules around return, withdrawal and takeover of a company car after a dismissal – including the main tax traps to avoid.

Return of the company car after termination

As a rule, the vehicle has to be returned to the employer’s business address no later than the last day of the statutory or contractual notice period.

Duty to return when car is for business use only

If the car was provided for business trips only and you keep working until the end of the notice period, you can keep using it until then.
If you are released from work (Freistellung) with immediate effect, the car must be returned on the last actual working day.

Duty to return when private use is allowed

Normally, private use is contractually allowed and the benefit is part of your salary. Thats what makes most company cars so sweet (that and the tax advantage). In this case, the employer cannot simply take it away at will. Therefore:

• If you work until the end of the notice period, you keep the car – including private use.
• Even during a release from work, the car may be used privately until the contract ends, unless a valid withdrawal clause applies.

Contract clauses in a termination or settlement agreement often specify the exact hand-back date. Example clauses:

“The employee returns the company car (licence plate …) including keys, papers and all accessories on … . For the early hand-back, the company pays a lump-sum compensation of … € gross.”

Or the opposite:

 “The employee may continue to use the company car privately until the contract end date. The car must be returned on … together with keys, papers and accessories.”

Oral side deals are risky. Many contracts require written form, which makes oral agreements invalid and hard to prove.

Termination without notice

A termination without notice (or: summary dismissal) ends the employment at once. The car must therefore be returned immediately. Parties may agree on a short grace period, but in practice this is rare.

Ongoing dismissal claim

Even if you file a dismissal protection claim, you must return the car in line with the contract or, at the latest, when the original notice period expires.

Invalid clauses

Clauses that allow the employer to withdraw private use at any time are often invalid. Courts apply strict standards.

Withdrawal of private use rights

Private use can only be withdrawn early if the clause meets the requirements set by the Federal Labour Court (Bundesarbeitsgericht):

1. The reasons for withdrawal must be clear and specific.
2. Withdrawal changes remuneration and is only allowed at the end of a month.
3. The reason must be objectively justified (e.g. release from work, loss of driving licence, parental leave).
4. The economic impact must be reasonable – less than 25 % loss of total pay.

Leasing clauses

If the employer leases the car, the employee still has to return it at the agreed date. The special issue is cost: ending the lease early may trigger break-costs. Contract clauses shifting these costs to the employee are only valid if they are transparent and not one-sided. Cour examples include:

• Invalid: Contractual clauses under which the employee must return the car when the employment ends, but still pay all remaining leasing instalments in one lump sum. This shifts the full lease risk to the employee and is not permitted.
• Invalid: Contractual clauses requiring the employee, after resigning, either to transfer the lease to their new employer or to find a replacement driver inside the old company who is entitled to a company car. This is considered unfair and non-transparent.
• Invalid: A blanket obligation to take over the leasing contract after a resignation. Such wording makes resigning harder and unlawfully transfers the employer’s business risk to the employee.

However, a takeover clause can be valid if the car was mainly used for private purposes, it was ordered at the employee’s request, and the employer has no business use for the vehicle once the employment ends. In that narrow scenario, shifting the economic risk to the employee is allowed.

Rights in case of unjustified early return demand

• Right to continued use: If the withdrawal clause is invalid, you can insist on using the car until the notice period ends. In practice, court action is often too slow.
• Damages: If the employer takes the car back without legal basis, you can claim compensation for the lost benefit, usually based on the 1 % rule of the list price.

Before signing any release or settlement agreement, check all wording on car return and withdrawal. One wrong sentence can cost thousands of euros in taxable benefits.

Buying the car after termination

Employees can negotiate to buy the car. Often this is combined with the severance payment (Abfindung). The price and all tax effects depend on individual negotiation and internal policies.

Purchase price and severance offset

If the agreed price is below market value, the difference counts as a taxable benefit. Market value can be proven by online car valuation tools or an expert report.

Tax aspects 

Unfortunately, there are no magic tax loopholes in Germany – neither for severance payments nor for returning or buying a company car. Still, there are a few levers employees can use to reduce their tax bill in individual cases:

• Check and document the purchase price: Have the market value of the car confirmed in writing (e.g. via DAT/Schwacke valuation or an expert report). This prevents the tax office from treating a “too low” price as a taxable benefit.
• Shift payments across tax years: If possible, place the severance payment and the car purchase in different calendar years – or in a year with lower overall income. This can reduce tax progression.
• No commute, no surcharge: During a release from work (Freistellung) there is no commute. The 0.03 % surcharge for home-to-work travel can therefore be reduced to zero. If the employer does not adjust it, the employee can correct it in their tax return.
• Apply the 1 % rule proportionally: If the car is not used for the full last month, the 1 % rule may be applied on a pro-rata basis. That lowers the taxable benefit in the final payroll month.

In practice, tax issues should already be part of the severance negotiation. Our severance calculator helps you estimate the net effect of your package, and we have also compiled 10 practical tips on how to save taxes on a severance payment.

Frequently asked questions (FAQ)