Vehicle Registration Tax and Motor Vehicle Leasing

When a motor vehicle is registered for use in Denmark, vehicle registration tax is, as a starting point, payable.

The tax depends among other things on the value of the vehicle and on a number of further circumstances. The rules give rise to particular uncertainty in relation to imported vehicles, leasing, valuation and the settlement of the tax.

In an individual case there may therefore be disagreement both about the value of the vehicle and about the tax treatment to be applied.

Under a lease, the lessee obtains the right to use the vehicle for a defined period, while ownership as a starting point remains with the leasing company.

For registration tax purposes, it is essential that the leasing arrangement genuinely has the character reflected in the leasing agreement.

It is therefore not always sufficient that a formally correct leasing contract exists.

The Danish Motor Vehicle Agency may also consider how the agreement has been performed in practice, who genuinely bears the financial risk, how payments have been made, and what rights and obligations the parties have had.

This is often where the larger disputes arise.

Finance leasing resembles, in several respects, the financing of an ordinary car purchase.

The leasing company owns the vehicle, while the lessee pays for the right of use throughout the leasing period.

Under finance leasing, the lessee will normally bear a greater share of the financial risk associated with the vehicle than under operating leasing.

The agreements may include provisions on residual value, the initial payment and the lessee's obligations at the end of the leasing period.

The specific drafting and handling of the agreement may become relevant if the Danish Motor Vehicle Agency later examines the arrangement.

Under operating leasing, a greater share of the risk rests with the leasing company.

The leasing company will typically be responsible for a larger part of the matters attaching to the vehicle, while the lessee pays for having the vehicle at its disposal during the leasing period.

Operating leasing therefore resembles an ordinary rental arrangement more closely.

The distinction between finance and operating leasing may be relevant in several contexts, but in a registration tax case it is always necessary to examine the specific agreement and the way the leasing arrangement has actually been performed.

Flex leasing is a lawful form of leasing under which, pursuant to section 3 b of the Danish Registration Tax Act, proportionate vehicle registration tax may be paid for the period during which the vehicle is leased and used in Denmark.

Instead of paying the full registration tax at once, a proportion of the tax is paid, calculated on the basis of, among other things, the age of the vehicle and the length of the leasing period.

The scheme can reduce the capital tied up in registration tax during the leasing period.

This presupposes, however, that the conditions of the scheme are met. If the Danish Motor Vehicle Agency considers that they are not, the consequences may be considerable.

One of the more serious situations arises where the Danish Motor Vehicle Agency takes the view that a leasing arrangement cannot be recognised under the rules on proportionate registration tax.

The agency may, for instance, question the content of the leasing agreement, the payments between the parties, amendments to the agreement, or the way the vehicle and the leasing arrangement have actually been handled.

If the arrangement is rejected, the agency may demand full registration tax on the vehicle. Such a claim may be substantial, in particular where the case involves several vehicles.

Questions may arise at the same time as to who is liable for the registration tax.

It is therefore important not only to examine whether a formal error has been made. It must also be assessed whether that error in fact provides the agency with a basis for the tax consequence it seeks to impose.

In cases concerning leasing and registration tax, liability may become a separate point of dispute.

This applies in particular where the Danish Motor Vehicle Agency considers that the conditions for proportionate registration tax have not been met.

Depending on the circumstances, a tax claim may affect several of the individuals or companies involved in the vehicle and the leasing arrangement.

When we review such a case, we therefore consider both the tax claim itself and whether there is a sufficient basis for pursuing it against the individual party.

In many leasing cases the documentation becomes central.

The leasing contract is of course important, but it does not necessarily stand alone.

Weight may also be attached to payments, invoices, correspondence, residual value arrangements, amendments during the leasing period and the actual handling of the vehicle.

It is therefore important to assemble the full course of events before taking a position on the assessment made by the Danish Motor Vehicle Agency.

At HAY LAW we review both the contractual basis and the factual circumstances in order to assess whether the agency's claim has the necessary foundation.

Split leasing is typically used where the same vehicle is used for both business and private purposes.

The employer and the employee each enter into a separate agreement with the leasing company and each pay their share of the costs of the vehicle on the basis of actual driving.

If the arrangement meets the tax conditions, the employee may avoid ordinary taxation of company car benefit. This requires, however, that the arrangement is also operated correctly in practice.

There must be separate agreements, the costs must be allocated according to actual private and business driving, and adequate mileage records must be kept.

If the conditions are not met, the employee risks being taxed on the company car benefit.

Problems often arise because the arrangement described in the contracts differs from the way the vehicle has actually been used and paid for.

This may involve deficiencies in the mileage records, an incorrect allocation of costs or a lack of ongoing adjustment between private and business driving.

In such cases it must be assessed specifically what significance the error identified actually has.

It is not enough merely to establish that there is an administrative error. What matters is the tax consequence that the error should have under the applicable rules and practice.

If a split leasing arrangement cannot be recognised for tax purposes, the employee may, depending on the circumstances, be taxed on the value of the company car benefit. The taxation of the employee is handled by the Danish Tax Agency.

The value is calculated under the rules on company car benefit in force at the relevant time.

It is therefore not only the leasing arrangement itself that may have financial consequences. A rejection may lead to a subsequent tax case concerning the taxation of the employee.

At HAY LAW we therefore consider the case as a whole and not only the individual leasing agreement.