Company provided cars have become a very sensitive subject in Belgium. The story started many years ago, when the use of company owned or leased vehicles was only granted to a limited group of senior executives (so-called ‘salary cars’) or to employees with jobs, requiring them to be frequently on the road (sales people, service engineers, etc… – ‘functional cars’).
In those old days, the company car benefit was subject to a favorable tax and social security treatment as compared to cash remuneration. This strange tax difference, which has often been criticized by European officials, has led to a fast growth of company provided vehicles Belgium, especially of the ‘salary cars’. More and more employers started offering cars as part of the total remuneration of employees and as a weapon in the war for talent. Even starters or lower level administrative staff members now often get a company car.
In line with the growth of company provided cars, the Belgian car park has grown throughout the years. Unprecedented cheap mobility has induced lured employees into jobs, which are quite distant from their home, or to purchase homes at more remote locations, away from efficient public transportation. At the same time measures have been introduced to create low volume roads by concentrating traffic on a limited number of main roads.
The results of all these factors become more and more visible every day, as roads in and around cities got congested, combined with negative environmental consequences.
Also in line with a long tradition, the Belgian government mainly tries to steer behavior of people through tax measures and tends to overlook alternative ideas. In the upcoming 2017 tax legislation, company cars have an interesting place in the corporate tax section. The measures not really aim at improving mobility and environment, but are set up as a method to compensate tax rate reductions by increasing taxes on company provided cars.
In this way, we will see increasing taxable benefit values for employees and also significant limitations to the deductibility of car related expenses by the employer.
Apart from taxes as such, it is interesting to have a look at the technological evolutions, more specifically at so-called ‘hybrid’ vehicles, which combine a traditional propulsion (mainly petrol or diesel) with an electric engine. From an environmental point of view, the sub-category of ‘plug-in’ hybrids is interesting. These vehicles have a large battery capacity, which can be charged on the electricity grid instead of charging on the traditional fuel engine.
When properly charged and mainly used for low distance travel in congested areas, plug-in hybrids can mostly operate on battery power alone. Under such circumstances, they are highly energy and cost efficient. Their environmental impact is then beneficial, though when looking at traffic congestion, they offer no benefit as compared to any traditional vehicle.
As mentioned above, the Belgian government has a long tradition of steering behavior through tax measures. Belgian citizens (the tax payers) have an equally long tradition of trying to reduce their taxes by making smart decisions. Also in the area of company provided cars, the game is now fully on, especially for the plug-in hybrids. For traditional hybrids, which can not be connected to the power grid, the rules are not (yet) changing.
When looking at car prices, it is clear that the cost of the technology limits the financial opportunity for employers to offer plug-in hybrids to large groups of employees. For the typical functional cars (sales people, service engineers, etc…) with a high daily mileage the technology may not always lead to optimal results. Plug-in hybrids at this moment are mostly suitable as ‘salary cars’.
It is at this moment hard to find any plug-in hybrids, at a cost below 40.000 Euro and it is not difficult at all to find models costing in excess of 70.000 Euro. This has induced the German ‘premium’ car manufacturers to eagerly invest in this market segment.
One can note the paradox (the Mattheus effect) that the highest tax incentives (and cost to society) seem to be reserved for the most highly-paid individuals, who have the privilege to make use of such costly vehicles. It gets even worse when noticing that some drivers just take the tax breaks without even taking the effort to regularly plug-in the vehicle to the electricity grid or use the cars for long distance fast travel, where the electric engine is of little or no use.
This now leads to a brand new tax category in Belgium, the so-called ‘fake hybrids’. These vehicles have such limited battery capacity that they will in day to day use only benefit from the electric technology to a very limited extent. Therefore they mostly run on the conventional fuel engine. They are rather purchased for their favorable tax treatment and high status or salary value and not due to any environmental considerations.
A simple method could have been invented to counter this effect by limiting tax benefits to the more cheap vehicles, the purchase of which does not exceed a certain cost. If, for example, a cost limitation to around 40.000 Euro would have been introduced for favorable tax treatment, all typical status vehicles would automatically have been excluded in a very simple way.
Instead, the government has jumped into a technology race by looking at the battery capacity in comparison to the weight of the vehicle in order to make a distinction between ‘true plug-in hybrids’ and ‘fake plug-in hybrids’. The current tax favorable treatment will only be continued from 2020 onwards for ‘true’ vehicles with a battery capacity of at least 0,60 kWg per 100 kg weight (this factor will evolve in time). For cars, not reaching this figure, the rules will be applied for a ‘comparable model’ with a conventional propulsion. If no such model (to be defined in a future Royal Decree) can be found, the official CO2 emission level is for tax purposes multiplied by 2,5.
The consequences for a car model to be qualified as a ‘fake plug-in hybrid’ are quite destructive. For the employee, the taxable benefit will quickly multiply by 2, 3 or even more. For the employer, the cost deductibility most often drops from 100% to only 50-60%.
When looking at a list of 25 plug-in hybrid car models, currently on the Belgian market, we noted that only 4 of them qualify for continued favorable tax treatment. This includes two typical status cars, such as the Porsche Panamera and the Audi A7. The other two vehicles on the list are more modest (Mitsubishi Outlander and VW Passat), though are still costing in excess of 47.000 Euro.
There is a transitional period for the new rules. Cars, ordered before 1 January 2017 will continue to be treated under the old favorable tax regime. Clever tax planners are likely to pay their car dealer a quick visit before year-end to benefit from a last tax break.
We noted that a significant number of vehicles is just below the technology limit, as currently defined by the government. This segment includes the hybrid pioneer car Toyota Prius (value 0,58) and its recent challenger the Hyundai Ioniq (value 0,59). 5 other cars are similarly close to the 0,60 limit. It is already expected that car manufacturers will quickly react by stripping some equipment (i.e weight) from their base model (before options) so that they will manage to reach the tax threshold. If the cars are subsequently loaded with options, fake hybrids can become true hybrids and we are back at a loss position for the environment and may continue to sponsor status by tax breaks.
Cars, which are too far away from the tax limits, including some very popular models, are likely to soon be wiped off the Belgian market.
The new law has not yet entered into force, so changes in theory are still possible. Given the way in which tax laws are created and the related complex political balances, last minute significant changes to upcoming legislation are, however, rather exceptional.
Purchasers of plug-in hybrids are now recommended to seek up-front tax professional tax advice or to enter into a ruling with the tax authorities before signing any new purchase agreement. Car dealers are recommended to add specific tax disclaimers in their purchase orders to avoid future claims from customers.