Belgium for many years has a favorable taxation regime for company provided cars. Together with certain pension benefits and stock options, company cars are the last items that one can find in a remuneration package, which are still subject to a more favorable tax and/or social security treatment as compared to salaries.
At the end of 2011, drastic changes were made to the tax regime, which is applied on company cars. The rules for calculating the taxable benefit in kind shifted from the parameter ‘fiscal horsepower’ (which was mostly driven by the size of the engine of the vehicle) to a combination of CO2 emissions and the value of the car.
These changes did not affect all company car users in the same way, but mainly came as a shock to owners of small companies and of senior executives of companies, who tended to drive cars, which combined a high price tag with a high level of CO2 emissions. For them, the taxable value of the car could move upwards with 300% or even much more.
Some tax payers have tried to be creative in order to mitigate the tax increase. One of the solutions was to have a second (private) car and to ensure that the expensive company provided vehicle was exclusively used for professional purposes (but excluding commuting between home and work place, as this is treated as private use of the car). Tax rulings have confirmed the feasibility of this scheme, but at the same time, the tax payer needs then to set up a 100% foolproof system in order to ensure that the vehicle indeed was exclusively used for professional purposes.
This leaves some owners of very nice cars to sit in their home, watching their gleaming automobile without being able to use the vehicle at will at the nicest possible time (often when they are not working).
Other tax payers found a solution by renting out a privately owned car to the company, which was controlled by them. By doing this, they could earn rental income (for the professional use of the car), which was treated as passive income and therefore subject to reduced taxation at a fixed rate of 25%. Inevitably, the tax authorities have tried to challenge this approach.
A case came before the courts of Antwerp and an interesting decision was issued by the Antwerp Court of Appeals on 24 June 2014. In the case at hand, the tax authorities tried to requalify the rent for the car as director income, taxed at the highest progressive tax rates. The court did not accept the arguments of the tax authorities and maintained the taxation at the lower rate, as applicable on rental income.
In the meanwhile, it becomes apparent that tax payers and car manufacturers have found a much easier and more effective way to deal with the tax increase of 2011. By making an intelligent selection of the car, one can quite easily find an interesting combination between a reasonable car value and a low CO2 emission. In this way, one can quickly reduce the taxable car benefit to the ‘old’ (pre 2012) values or even below that level.
On the roads, one could very quickly notice the shift, whereby certain types of car (for example large CO2 inefficient SUV-type vehicles) were replaced by low CO2 emission type vehicles. The only victims of this shift were the ego of a group of car drivers, and in the end the government, which has seen car-related tax revenues dwindle.
This is a clear illustration of the Laffer principle, whereby a tax increase (beyond certain limits) in the end results in a reduction of fiscal revenues. In addition, the tax increase on company cars may have influenced the politic preferences of certain tax payers and may to some extent have contributed to the changes in the political landscape one could recently observe. Whether the environment has benefited from the reduction in CO2 emission is not so clear, as the number of former high CO2 emission cars maybe was not so significant compared to other sources of CO2, which exist in and around Belgium.