Company car upon termination – is it mandatory to return it?

After termination, many employees ask themselves what will happen to their company car upon termination. Can I keep the company car upon termination? The answer depends on the type of use: company cars used purely for business purposes often have to be returned immediately upon termination. Company cars provided for private use may often continue to be used during the notice period or leave of absence, as they are considered part of the compensation. But once the employment relationship has ended, the rule is usually: return the car. Are there exceptions? Can you negotiate to keep the car after you have resigned? In this article, you will read everything you need to know about returning company carsand what options you have.

When does the company car have to be returned upon termination?

The return of the company car upon termination depends on various factors. A distinction must be made depending on whether the employer demands the return of the company car during the notice period, a possible leave of absence or at the end of the employment relationship. It is also crucial whether the company car was also allowed to be used privately or was used exclusively for business purposes.

3 questions you need to be clear about:

• Type of use: Is it for business use only or is private use allowed?
• Period of time: Does it concern the period of the notice period, release or after termination?
• Contractual regulation: Are there clauses in the employment contract or a company car agreement, in particular regarding revocation, release or purchase options?

Important: Verbal promises are not worth much. Almost all employment contracts have a written form requirement for additional regulations. And it is difficult to prove a verbal statement in court.

Company car with private use

If the company car has also been provided for private use, this use is considered a non-cash benefit and must be taxed accordingly (usually according to the 1% rule). The company car is therefore part of the salary, which means that you are entitled to use of it until the end of the employment relationship – even if you are released from work.

Private use of a company car is an essential component of compensation. The employer cannot simply reduce or withdraw this compensation without making a valid contractual amendment. If you do not agree to such an amendment, the only option left to the employer is a termination with the option of altered conditions of employment. However, this requires certain reasons for termination, especially if statutory protection against dismissal applies. The entitlement to private use therefore remains as long as the employment relationship exists.

The company car must therefore be returned at the latest on the last working day or in accordance with the contractual agreement. Many employers have clauses in the employment contract that allow for early reclamation, e.g. in the event of an exemption. However, such a revocation proviso must be specific and not too general in order to be effective. It is advisable to check your employment contract for specific clauses regarding revocation or use during the period of leave and to have a lawyer check it for effectiveness. However, since the company car with private use is, as already mentioned, a salary component, it cannot be reclaimed so easily during the period of leave. If the employer unjustifiably demands the car back prematurely, i.e. without a contractual basis, you can demand compensation for the lost private use value.

Company car for business use only

If the company car was intended exclusively for business purposes, it must be returned as soon as it is no longer needed for the fulfilment of the employment contract. In the case of a leave of absence after termination, the company car can usually be immediately reclaimed. But here, too, it is worth taking a look at the employment contract and company car agreement to see if there are any special provisions for returning the car.

Company car in the event of instant dismissal

If an employee is terminated without notice, they usually have to return the company car immediately, even if they file an action for unfair dismissal. The case is different if the employee uses the company car privately and files a lawsuit against the dismissal. In this case, the employer can only reclaim the car prematurely if it can credibly prove, by means of a court order (i.e. a temporary injunction), that it will win the dismissal proceedings. This means that the employer must credibly demonstrate that its dismissal was lawful in order to recover the company car in advance.

Company car during the action for unfair dismissal

During a legal challenge to a dismissal, the employee must initially return the work equipment provided to him, such as a company car, after the notice period has expired. If an action for unfair dismissal is successful and the employment relationship is deemed to continue retroactively, the employee is not only entitled to the lost salary. They are also entitled to the use of benefits guaranteed in the employment contract, such as a company car. If the company car was withdrawn during the notice period, you are entitled to the lost non-monetary benefit. This applies to the entire period during which the termination was ineffective.

Keep the company car after termination

Many employees want to buy their company car after the end of their employment relationship. So if you want to keep the company car for private use, it is worth talking to your employer. Typically, such an agreement is made in termination agreements or when negotiating a severance payment. The conditions under which you can buy the company car depend largely on your negotiating skills. In some companies, there are also special company agreements or other internal policies.

Company car: purchase price and severance pay

If the purchase of the company car upon termination is regulated together with severance pay, the purchase price can be offset against the net amount of the severance pay. However, if the purchase price is lower than the market value of the vehicle, the employee incurs a taxable non-cash benefit equal to the difference between the two amounts. This may result in additional claims by the tax office. To determine the market value, you can either research the used car market or have the company car valued by an expert. As with a normal used car purchase, the model, year of manufacture, condition of the vehicle, kilometres and (special) equipment are particularly important for determining the market value.

An example:

Your company car is five years old and has been used intensively for both business and private purposes.

• Gross list price: €50,000
• Current market value: €20,000
• Purchase price from employer: €15,000
• Non-cash benefit: €5,000

The purchase price can then be offset against a severance payment, for example. So if you have negotiated a severance payment of €5,000 gross per month with a factor of 0.8 and 10 years of service, your severance payment will be taxed at a rate of approx. 40% if everything is paid out in the same calendar year. So:

• Gross severance pay: 0.8 * €5,000 * 10 = €40,000
• Net severance pay: 0.6 * €40,000 = €24,000 (at 40%)

You would now pay the purchase price of €15,000 to your employer from these €24,000. You would then be left with €9,000 of the severance pay and the company car. In addition, however, you have gained €5,000 in monetary value by paying a lower purchase price than the car is worth. This must now also be taxed, most likely at the top tax rate of 42%, which means that a further €2,100 of the remaining €9,000 of the severance pay will go to the tax office.

• Net severance pay: €24,000
• Purchase price of company car: €15,000
• Remaining severance pay: €9,000
• Tax burden on non-cash benefit: €2,100 (€5,000 * 0.42 top tax rate)

Result: €6,900 net severance pay plus company car valued at €20,000

Tax tips and tax traps

Unfortunately, there are no major tricks for reducing the tax burden in Germany. Nevertheless, there are a few regulations that can help in certain cases:

• If a company car is provided after the termination of an employment contract as part of a severance package, the ‘one-fifth rule’ can lead to a tax relief.
• According to § 37b (2) EStG, there is the possibility of a flat-rate taxation of 30%. However, it should be noted that the purchase price reduction must not exceed €10,000.

In general, you should always keep an eye on the tax issue when negotiating your severance pay. Our gross-net severance pay calculator (severance pay) helps you to get an initial overview of the tax consequences of your own ‘severance package’. We have also summarised 10 tips on how you can save taxes on severance pay in our blog for you.

Severance pay upon termination of the employment contract by court order

If the employment relationship is terminated by the labour court because it is no longer reasonable to expect the employee to continue it, the court determines the amount of the severance payment in accordance with Section 9 of the German Unfair Dismissals Protection Act (KSchG). In this case, a company car used for private purposes is to be included in the calculation of the severance payment with the monetary advantage.

Company car upon termination – These clauses are invalid

Employment contracts and company car agreements often have clauses that give the employer the right

1. to revoke private use of the company car prematurely or
2. to transfer the leasing contract to the employee at the end of the employment relationship.

However, these clauses are often invalid.

Revocation of private use of the company car

If you have a contractual right to private use of a company car, your employer may not revoke this arbitrarily. According to the Federal Labour Court (BAG), a revocation clause that allows the employer to revoke private use at any time without objective grounds is too broad and therefore invalid (judgment of 19 December 2006, 9 AZR 294/06). A valid revocation clause must therefore state factual reasons, such as a leave of absence, a dormant employment relationship, a change of job or the loss of a driving licence. General ‘economic reasons’ are not sufficient; they must be specifically mentioned in the clause. In addition, the reservation of revocation is only valid if the loss of private use of the company car is less than 25% of your gross monthly income.

If one of the above reasons applies, your employer can reclaim the company car upon termination, but must also grant you a reasonable grace period (usually one month) to organise a replacement vehicle. Even in the event of a leave of absence, the company car may not be reclaimed until the end of the month, as the monetary advantage is taxable for the entire period (Section 6 (1) no. 4 of the German Income Tax Act (EStG)). If there is no such cancellation clause or if none of the reasons apply, a withdrawal is only possible by means of a dismissal with the option of altered conditions of employment, which, however, places high demands on the justification.

Taking over the leasing contract

Many employers provide company cars by means of a leasing contract. Company car leasing contracts usually have a fixed minimum term. So employers try to pass the costs on to the employee in the event of the employee leaving the company prematurely. These 3 clauses are common:

1. You should, upon termination of the employment relationship, return the company car used for private and business purposes, but still pay the instalments due for the remaining term of the leasing contract in a single amount.
2. You should, after resigning, bear the additional costs for terminating the leasing contract.
3. You should pay the additional costs of the special equipment for the remaining term of the leasing contract.

These clauses are generally invalid because they constitute an impermissible impediment to termination and thus a restriction of the freedom to choose an occupation.

If, on the other hand, the company car was used primarily for private purposes and was not necessary for work-related activities (i.e. it was provided at your request), the main interest lies with you as an employee. In this case, an obligation to take over or assume liability in the event of termination (at your own request) may exceptionally be effective. In this case, you can keep the company car, but you must also take over the payment of the leasing instalments.

What rights do I have in the event of an unjustified reclaim?

If an employer demands the premature and unjustified return of a company car, employees have several rights to protect themselves:

1. Right to continued use: As mentioned above, an employer may not generally demand the return of privately used vehicles during the notice period or a period of leave without pay without a contractual basis. Such work equipment is considered a non-monetary benefit that the employee may use until the end of the employment relationship.
2. Revocation clause: Many employment contracts or company car agreements have a clause that allows the private use of the car to be revoked prematurely (with or without reason). In particular, the revocation of the private use of the company car is only effective under strict conditions and should be checked by a lawyer. General clauses that allow the employer to reclaim the car unilaterally without an objective reason are often invalid.
3. Compensation for damages: If the employer demands the return of the company car prematurely and without legal basis, you can demand compensation for the lost private use value. The compensation is based on the tax assessment of private use (e.g. 1% of the gross list price of the vehicle per month).

All in all, it is therefore advisable to check the employment contract carefully for cancellation and return conditions and to seek legal advice in the event of an unjustified reclaim, as the employer is also liable for any damages incurred in such cases.

FAQ about company cars after termination

Do I have to return the company car immediately if I resign?

Not necessarily. If the company car was also used privately, you are generally allowed to continue using it until the end of the notice period, and also in the event of a leave of absence. However, check your employment contract for specific regulations.

Can I keep my company car after I quit?

Under certain conditions, such as a purchase option or as part of a severance package, it is possible to keep the company car. However, this must be agreed with the employer.

What happens to the company car in the event of summary dismissal?

In the event of summary dismissal, the company car must usually be returned immediately. If the car has been used privately and an action for unfair dismissal is pending, the employer may only reclaim the car prematurely if it proves the legality of the dismissal by means of an injunction.

Can my employer revoke the private use of the company car in the event of termination?

A revocation of private use is only effective under certain conditions. These must be contractually regulated and specifically justified. General formulations in the contract without precise reasons are therefore usually ineffective.

What happens if my employer reclaims the company car prematurely?

If there is no contractual basis for an early reclamation, you can claim compensation for the lost private use value.

Do I have to take over the leasing contract for the company car after termination?

Usually, a clause that obliges you to take over the leasing contract is invalid. In exceptional cases – if the company car was not provided for business purposes – a clause can be valid.

What can I do if the company car is reclaimed without authorisation when I terminate the contract?

If the company car is reclaimed without justification and without a contractual basis, you can claim compensation for the lost private use value. Legal advice can help here to secure your claims.