The impact of ESG on the taxation of your corporate fleet

Thanks to the growing awareness around ESG (Environmental, Social and Governance), the decision-making process of companies is increasingly influenced by matters like energy consumption, climate, health, safety and good corporate governance. ESG seeks for an equilibrium between financial economic results, transparency, social interests and the environment without losing the balance between them.

It should therefore be no surprise that also the tax authorities are stimulating tax payers (more specifically companies) to greening their company car fleet by allowing a higher tax deduction for so-called ‘green cars’ and disallowing the deduction of ‘fuel cars’ going further. Next to the tax impact, the greenification of the company car fleet offers opportunities to create added value for companies, climate and their people from an innovation perspective.

Towards a greener corporate fleet

Current regime (cars purchased/car leasing contract concluded prior to 1 July 2023)

As per today, the deductibility percentage of car costs is determined based on a formula that takes into account the car's CO2 emission and fuel type, leading to a lower tax deductibility in case a company car has a higher CO2 emission or a more polluting fuel type (for example, CNG is less penalised than diesel).

Hence, already today companies are being penalised for choosing polluting cars.

Upcoming regime (cars purchased/car leasing contract concluded as from 1 July 2023)

Going forward, combustion-engine cars (including hybrid cars) will gradually have a decreased deductibility depending on the moment of purchase or moment of concluding the car leasing contract. The tax deductibility of a combustion-engine car purchased as from 1 July 2023, will vary between 50-100% in financial year 2023, while the tax deductibility will be further reduced to 0%-25% in financial year 2027.

Please find hereafter the table including the deductibility per year.

At the same time, so-called carbon emission-free cars (for example, hydrogen or electric cars) will benefit from a 100% deductibility until financial year 2026.

In a next phase however the tax authorities will discourage the use of company cars in general, whereby also the deductibility of the so-called green cars will gradually decrease. We refer to the table below.

Conclusions and action points

The new rules do not ban combustion-engine cars (including hybrid cars) as such, but are discouraging the purchase or lease of these cars going forward due to the limited deductibility. At the same time, additional tax reliefs have been made available to facilitate the electrification of the company car park (for example, increased deductibility for the installation of charging stations).

The impact of the total cost of ownership on the leasing budget

Due to the increased differentiation tax-wise for combustion-engine cars versus carbon emission-free cars, the tax component gains in importance when it comes to the total cost of ownership (hereafter referred to as: ‘TCO’). This term encompasses the total use cost of a car.

While the tax impact was in the past not a determining factor, it has now a significant role in the calculation.

The purchase price as such of electric cars is higher than comparable combustion-engine cars or the hybrid-equipped variant. However, the tax costs of an electric car are significantly lower. For example, in financial year 2026 the costs of an electric car will be 100% deductible, while the costs of a combustion-engine will be deductible for maximum 50%. This percentage should be taken into account for your leasing costs, insurance, fuel etcetera, whereby the impact cannot be underestimated.

In addition, the benefit in kind for company cars is significantly lower for carbon emission-free cars in comparison to combustion-engine cars. Given that the benefit in kind related to company cars constitutes a minimum taxable base at the level of the company, this has also an indirect impact (this means, the lower the benefit in kind of the employee, the lower the minimum taxable base of the company).

If you would like to calculate the benefit in kind related to company cars, you can consult our calculation tool.

Food for thought…

Is the push from the tax authorities sufficient to convince you to greenify your car fleet? It may be the ideal moment to scrutinise your car fleet and governance and to calculate the real total cost of ownership (which means, including the tax impact).

Don’t forget that greening your car fleet will anyway enhance your corporate image when it comes to ESG!