Luxury class business vehicles

1 Standard situation

Employers provide their employees with a business vehicle in case they need one to fulfill their duties. It is common for employees to be allowed to also use the company car for private purposes, whereby the entire costs incurred (business and private use) are usually borne directly by the employer.

Depending on the acquisition value, business vehicles are treated for tax purposes as either "normal class business vehicles" or "luxury class business vehicles". The following blog post shows the tax consequences of this distinction.

1.1 Taxes on profits at the level of the employer

The purchase of company vehicles is an investment under commercial law and must be capitalized. The asset is depreciated over several years through profit and loss. Depreciation on company vehicles in the income statement is considered to be business-related and thus recognized for tax purposes, provided that the purchase of the vehicle is related to the business activity. The requirements of the tax authorities regarding this connection are however, for understandable reasons higher for luxury class business vehicles than for normal class vehicles.

1.2 Income taxes at the level of the employee

As mentioned above, the employee who uses a business vehicle will be subject to income tax on the private use of the business vehicle as a salary component. The amount of the share for the private use of the business vehicle is a flat rate of 0.8% (per month) until the end of 2021 and 0.9% (per month) of the purchase value of the business vehicle from 1 January 2022.

From 2022, the costs for the use of the business vehicle to commute to work will be included in the increased lump sum which means that the previous income tax offsetting of the commute to work will cease to apply.

2 "Luxury class" business vehicles

2.1 Taxes on profits at the level of the employer

2.1.1 The "Appenzeller-method"

A leading decision of the Federal Supreme Court of 1 May 2015 (2C_697/2014) concerned the taxpayer X. GmbH with its registered office in the Canton of Appenzell-Ausserrhoden operating in real estate trading who had aquired a Porsche worth CHF 143,000 for its sole shareholder and managing director X as a business vehicle. In the 2010 financial statements, X. GmbH depreciated the Porsche by CHF 57,200 (40% of CHF 143,000) through profit and loss.

The cantonal tax administration of the Canton of Appenzell-Ausserrhoden corrected this accounting and instead only recognised a depreciation of the business vehicle in the amount of CHF 40,000 (40% of CHF 100,000) for tax purposes, thus in effect eliminating a non-business-related luxury portion of the vehicle for tax purposes. The tax office added the excess depreciation to the taxable profit of X. GmbH's taxable profit.

2.1.1 The "Zurich-Method"

The decision of the Tax Appeal Court of the Canton of Zurich (DB.2018.49, ST.2018.60) of 26 October 2018 concerned A. AG, a taxpayer domiciled in the Canton of Zurich, which declared a taxable net profit of CHF 11'570 in its 2013 tax return. During the audit, the cantonal tax office of Zurich determined that shareholder X (managing director and Board of Directors of A. AG) drives a Bentley Continental New GTC (acquisition value CHF 220,000) as a business vehicle. In the assessment procedure, the private share at the expense of shareholder X was subsequently increased from 9.6% to 14.0%.

The private share of 4.4% (on the acquisition value of CHF 220,000), which had not yet been booked, was added to the taxable net profit of A. AG at the level of state and communal taxes by the tax office of the Canton of Zurich.

According to the Court of Appeal for Tax Purposes, with reference to the decision of the Federal Supreme Court of 1 May 2015 (2C_697/2014), it is permissible to exclude a luxury portion in the case of luxury vehicles if the use of such a vehicle is not justified for business purposes.

A. AG referred to confirmations from customers in which their expectation was expressed that their trustee would drive up to them in a luxury class vehicle. According to the Tax Appeal Court, however, the taxpayer was unable to prove that this was justified in business terms, especially as the taxpayer does not actively appear as an auditor for its clients.

The Administrative Court of the Canton of Zurich supported the jurisdication with the decision of 11 February 2019 (SB.2018.00135) in the last instance and reaffirmed this jurisdiction only recently on 30 July 2020 (SB.2020.00025) in a similar case.

2.1.3 Canton of Lucerne

According to a general announcement (08 / 2016 tax + practice), the Canton of Lucerne refrains from a general practice on the exclusion of a luxury share for business vehicles.

Whether depreciation on a luxury business vehicle is justified, is examined in Lucerne on a case-by-case basis and is permissible if it is related to the business activity. Depreciation is not permitted if the assets serve private purposes.

In particular, according to the Tax Office of the Canton of Lucerne, in the case of small businesses (e.g. bakeries), it is assumed that there is no business connection between the business activity and the hight-end business vehicle. The costs are considered to be non-business-related and are fully offset against the company's profit as a pecuniary benefit for tax purposes.

2.2 Income taxes at the level of the employee

2.2.1 "Appenzeller-method"

When applying the so-called "Appenzeller method", which according to the decision of the Federal Supreme Court of 1 May 2015 (2C_697/2014) also applies to direct federal taxes, the entire acquisition value of a vehicle initially qualifies as business assets.

If the acquisition value of a vehicle of the managing director exceeds the threshold value for a "normal business vehicle" of CHF 100,000, the annual depreciation on the amount above this threshold value qualifies as a hidden profit distribution to the managing director or majority shareholder. The latter can partly deduct the disguised distribution of profits.

On the first CHF 100,000, the private share is calculated at a flat rate of 9.6% (per year) of the acquisition value of the privately used business vehicle. In accordance with this method, no private share should be levied on a higher value.

2.2.2 "Zurich-method"

The calculation of the private share for business vehicles in the luxury class using the "Zurich-method" is carried out with a schematic increase in the percentage of the private share from the acquisition value.

In doing so, the Administrative Court of the Canton of Zurich, in its decisions of 11 February 2019 (SB.2018.00135) and 30 July 2020 (SB.2020.00025), respectively, relied on the unpublished "Orientation guide Luxury Cars" of the Cantonal Tax Office of Zurich, which provides for the following approaches:

• Acquisition value of CHF 120,000: flat-rate private and luxury share of 11%
• Acquisition value from CHF 300,000: flat-rate private and luxury share of 17%

On February 11, 2019 (SB.2018.00135), the acquisition value of the Bentley Continental New GTC was CHF 220,000. In terms of value, this is roughly in the middle, which is why an increase of the taxable lump-sum private share of 14% seems appropriate according to the Administrative Court of Zurich.

The increase in the private share was offset against the company's profits, which means that for the purposes of state and municipal taxes, the managing director/ shareholder receives a capital gain (hidden distribution of profits and thus no income from employment). On this amount the shareholder can shareholder can claim the partial income procedure.

2.2.3 Canton of Lucerne

Following an analysis of the Federal Supreme Court decision of 1 May 2015 (2C_697/2014), the Tax Office of the Canton of Lucerne concludes that in such a case the criterion of a business connection is met. This means that the full depreciation would be recognised as a business expense in accordance with the cantonal assessment practice.

According to the Tax Office of the Canton of Lucerne, to use the facts of the Federal Supreme Court decision of 1 May 2015, the taxable private share of 9.6 % should be assessed on the total acquisition value of CHF 143,000.

3 Concluding remarks

The tax consideration of a luxury share varies greatly between the Cantons and depends to a large degree on the discretion on the part of the authorities. The persons concerned should therefore always consult the relevant tax authorities before purchasing a luxury business vehicle in order to avoid any unpleasant surprises.

An analysis of the practices of selected Cantons also shows that Canton of Lucerne in particular has chosen an extremely pragmatic approach, which is very welcome from the point of view of taxpayers.

It appears to be unclear in the entire discussion how the AHV authorities stand on the tax differentiations for business vehicles. In the sense of the principle of the unity of the legal system it seems desirable that the tax qualification as partial property income would also be accepted from the perspective of social security law. However, we are unaware of a public practice in this respect.