Germany's New Car Tax Partially Based On CO2 Emissions

by Ulrika Lomas, Tax-News.com, Brussels

29 January 2009

Following weeks of internal political wrangling, Germany’s ruling coalition has finally reached a compromise: the new vehicle tax will be partially based on carbon dioxide emissions. Gas-guzzling cars will pay more, thus financing a reduction in the rate of tax for diesels.

Bowing to pressure from the Social Democratic Party (SPD), the Union has agreed that the environmentally friendly new vehicle tax will be determined both by the vehicle’s engine size and by the carbon dioxide emissions per kilometre travelled.

Under the terms of the new agreement, which sees the tax fall within the framework of Germany’s second economic stimulus package, for every gram of carbon dioxide emitted per kilometre over the permitted tax-free limit of 120grams, an additional EUR2 will be incurred. Engine size and type determine the rest. However, in accordance with the plan, this tax-free allowance is due to be lowered from 2011, in a bid to boost the construction of more environmentally friendly vehicles.

Although the proposals are designed to reduce costs for owners of small, fuel-efficient cars, they do little to penalise more powerful polluters. For example:

• Owners of a VW-Golf, with a 1.4 litre cubic capacity, running on petrol, will soon pay an annual tax of EUR86 instead of EUR94 currently.
• Owners of an Audi A8 diesel will pay EUR657 compared with EUR648.
• Those owning a heavy four-wheel-drive Q7 Audi will continue to pay EUR926 in tax annually.

Hailing the new plan as a resounding success, Environment Minister Sigmar Gabriel (SPD) added that a breakthrough was only narrowly achieved following the Union’s decision to withdraw its “nonsense” demands to impose a ceiling on tax for luxury, gas-guzzling four-wheel-drive vehicles.

The car industry association (der Verband der Autoindustrie) and the car club (ADAC) also welcomed the move.

Provided that the plan is approved by parliament, where it requires a two-thirds majority, the new tax enters into force from July 1, 2009.

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