Car rental between spouses
As an alternative to the purchase of a vehicle by an entrepreneur, car rental between spouses offers considerable advantages in terms of income tax and sales tax. Since a later sale is not subject to sales tax, a higher purchase price can effectively be achieved when selling to a private individual. Entrepreneurs who are not entitled to deduct input tax, in particular doctors, are also effectively able to partially deduct input tax. In addition, this model also enables income tax optimization during the sale.
In a judgment of September 29, 2022 (VR 29/20), the Federal Fiscal Court (“BFH”) sees no abuse of tax structuring in the so-called preliminary spouse model. Thanks to the recognition of the model, a legally secure implementation is now possible. The following explains how this design model works, as well as its tax implications and associated benefits.
the initial situation
An entrepreneurial or freelance activity often requires the maintenance of a car. The entrepreneur regularly has the choice of leasing or purchasing the vehicle. With leasing, the installments represent tax-reducing operating expenses, while when purchasing the car, the acquisition costs can be claimed as tax-reducing depreciation over six years. When selling the car, the book profit (sales price less the acquisition costs reduced by the previous depreciation) is taxable. In both cases, the current expenses for the car represent operating expenses. The private use of the vehicle is taxable using the one percent method or the logbook method. If the entrepreneur makes sales that are subject to VAT, he can deduct input tax from the purchase of the car or from the leasing installments. In this case, the sale of the vehicle is also subject to sales tax.
implementation of the model
In the pre-marriage model, the car is purchased by a third person, such as the spouse, who is financially independent of the entrepreneur. A leasing contract for the car is concluded between the spouses, which corresponds to the conditions that third parties would use as a basis for this transaction. For reasons of proof, a leasing offer should be obtained from a car dealership. A fixed basic contract term of 36 months is agreed, which can be extended if necessary. The running costs (e.g. insurance, maintenance, fuel) are borne by the user entrepreneur. After the end of this minimum term or a termination after an extended term, the entrepreneur as lessee may not be entitled to any purchase option agreed in the leasing contract. After the end of the lease term, the vehicle is sold by the lessor, for example the spouse. The lessor is not allowed to use the car himself and should therefore not be registered as the driver in the car insurance either.
Impact of Income Taxes
Effects on entrepreneurs as lessees
The leasing contract is designed in such a way that the economic ownership of the car does not lie with the entrepreneur using it. As a result, the leasing installments are tax-reducing operating expenses for the user and the car is not to be accounted for by him. The other costs for the vehicle also represent operating expenses. In the case of proportionate private use of the car by the lessee, the one-percent method or logbook method is generally used.
Effects on the lessor
The lessor generates so-called other income by renting out a vehicle. The income is determined by deducting the income-related expenses, in particular the depreciation of the car over six years, from the leasing installments received. If the income determined in this way is less than 256 euros per year, it is tax-free. If economic goods used to generate income (here: cars) are sold within ten years of purchase, this is a private sale transaction. A private sale is subject to income taxation at the personal tax rate. However, objects of daily use are excluded from the sale as a private sales transaction. The question now arises as to whether the sale of the car should be assessed as a tax-free sale of an object of daily use. This is indicated by the previous fiscal court decisions. It should be irrelevant whether the object of daily use was actually used to generate income or not. The sale of the car would therefore not be taxable.
Sales Tax Implications
Through the transfer of use, the spouse becomes entrepreneurial from a sales tax point of view. It is important that the leasing contract is actually carried out and that there is no sham transaction. If the income of the lessor does not amount to more than 22,000 euros per year, he is basically a small business and is not entitled to input tax deduction. In order for the input tax deduction from the purchase of the car to be claimed, the application of the small business regulation must be waived. As a result, the installments paid by the lessee are also subject to sales tax. If the lessee is entitled to input tax deduction, he can claim this. This means that the lessor generates an input tax deduction from the purchase of the vehicle, which would possibly be excluded for the entrepreneur using it. If the car is sold after more than five years, you can opt for the small business regulation again and the sale of the car is VAT-free. Since input tax deduction was possible from the acquisition, there is a tax advantage if the entrepreneur using the product is not entitled to input tax deduction. The pre-spousal model is therefore particularly interesting for doctors. Since the spouse is a sales tax entrepreneur, he is obliged to submit sales tax returns and annual sales tax returns.
Special features of corporations and partnerships
In principle, the pre-spousal model is also applicable if the lessee is a company. However, special features specific to the legal form must be observed here. If the lessee is a corporation, the lessor should not hold a majority interest in the company. If the lessor is a partnership, the lessor may not have a stake in the company, since in this case the vehicle would represent the shareholder’s business assets for tax purposes.
Interesting design tool
The spouse advance model for car rental is an interesting design tool that can be used to achieve significant tax advantages. Various conditions have to be met for this. In particular, the economic independence of the spouses must be preserved, the leasing contract must correspond to the arm’s length principle and its actual implementation must be guaranteed. Whether the design model can be used advantageously in individual cases, as well as the tailor-made design of the model, should always be the subject of a detailed examination.
