Tax measures can be instrumental in encouraging better ESG (Environmental, Social, and Governance) behaviour by businesses and individuals. By offering tax incentives and penalties tied to ESG performance, governments can stimulate positive environmental and social practices within the corporate sector. For instance, tax breaks for companies that invest in renewable energy, reduce their carbon emissions, or implement diversity and inclusion initiatives can drive corporate sustainability efforts. Conversely, imposing higher taxes on environmentally harmful activities or companies with poor social governance can discourage detrimental practices.
These tax measures create a financial motivation for businesses to align with ESG principles, which not only benefits the environment and society but can also foster long-term economic resilience by reducing externalities and promoting sustainable growth. In this article, we take a look at a range of measures from around the world.
In order to encourage the use of greener mobility options by commuting workers in Belgium, the Belgian authorities introduced a ‘Mobility Budget’ in 2019. One of the objectives of this measure is to encourage employers and employees to move away from using company cars, which are common in Belgium.
The mobility budget allows an employer to give employees the option to exchange their (entitlement to a) company car for a budget. The employee can spend the budget as they wish in 3 areas (‘pillars’), depending on what the employer chooses to make available.
Here is an overview of the three pillars. An employee may exchange a company car for:
Green commuting benefits
To encourage greener mobility for commuting workers, Finland offers a number of different fringe benefits. These include:
Welfare consists of goods and services provided by the employer to the employees that, in accordance with the relevant legal requirements, are not considered employment income for tax and social security purposes and whose value, therefore, is generally exempt from social security contributions (for both the employer’s and employee’s share) and from tax for employees.
Welfare services may concern specific areas provided for by law such as education for family members, assistance services for elderly or dependent family members, public transport, healthcare and insurance, supplementary pensions, recreation, education, training, social and health care or worship, and other fringe benefits (things like shopping vouchers, or a company car for personal use).
For each service listed above there are rules on who can benefit (the employee and/or their family members, who can be tax dependents or not, etc.), possible tax and social security contribution exemption limits and other requirements. Most of these benefits must be made available to all (or ‘homogeneous categories’ of) employees, as individual benefits are not allowed, apart from fringe benefits.
In terms of ESG, welfare plans promote employee well-being, and work-life balance, improving working conditions, reducing turnover and encouraging talent acquisition. The favourable tax treatment of low and no-emission company cars encourages the use of these vehicles.
Company performance bonuses
Law 208/2015 allows an employer to grant all or a specific group of employees a company performance bonus which, under certain conditions, may be subject to a reduced tax rate of 10%, unless otherwise provided for in other laws (e.g. for company performance bonuses paid in 2023 the rate is 5%). The following conditions must be met:
In addition to the application of the reduced tax rate, the introduction of a company performance bonus regulated by Law 208/2015 can guarantee other advantages:
The introduction of a corporate performance bonus does not lead to a direct tax benefit. However, many companies have decided to make these payments conditional on ESG indicators, especially with regard to environmental sustainability (e.g. the reduction of water, energy, paper waste, better waste management through separate waste collection, etc.) thus generating an indirect connection to ESG objectives.
Hiring people with disabilities
Article 186 of the Income Tax Law establishes a tax incentive for taxpayers, whether individuals or corporations, who employ people with disabilities. This covers people with motor disabilities requiring the permanent use of prostheses, crutches or wheelchairs; people with mental, hearing or language disabilities at eighty percent or more of their normal capacity, and blind people.
The tax incentive entitles the employer to deduct from the taxable income of the relevant fiscal year, an amount equivalent to 25% of the salary effectively paid to individuals with disabilities. In order to apply the incentive, a certificate of disability issued by the Mexican Social Security Institute must be obtained.
The same tax incentive is granted to taxpayers hiring senior citizens (i.e. those over 65).
In terms of ESG, this encourages companies to hire people whose age or disability makes it more difficult for them to find employment, thus promoting diversity and inclusion in the business world and the community.
Deductions for hybrid cars
Investments in Mexico may only be deducted by applying, in each fiscal year, the maximum percentages authorized by the Income Tax Law to the original amount of the investment, subject to legal limits.
Article 36 (II) of the Income Tax Law establishes that investments in automobiles will only be deductible up to MXN 175,000 (approx. USD 10,000) and establishes a higher amount of up to MXN 250,000 for electric, hybrid or hydrogen-powered vehicles. Similar benefits apply for leasing arrangements.
In terms of ESG, the fact that the maximum deduction amount is higher for hybrid/electric cars contributes to companies investing in cars for their employees that are less environmentally harmful.
Deductions for renewable energy
Investments in Mexico may only be deducted by applying, in each fiscal year, the maximum depreciation percentages authorized by the Income Tax Law to the original amount of the investment, subject to legal limits.
In this regard, Article 34 (XIII) of the Income Tax Law establishes that the authorized depreciation percentage in the case of machinery and equipment for the generation of energy from renewable sources or efficient electricity cogeneration systems is 100%. This applies as long as the machinery and equipment are in operation for a minimum period of 5 years immediately following the fiscal year in which the deduction is made.
Renewable sources include solar energy in all its forms, wind energy, hydraulic energy (kinetic and potential, from any natural or artificial body of water), ocean energy in its different forms, geothermal energy and energy from biomass or waste. The conversion of energy from renewable sources into other forms also counts as generation.
Likewise, Article 77-A of the same law provides that companies engaged exclusively in the generation of energy from renewable sources or efficient electricity cogeneration systems, may create a profit account for investment in renewable energies in the year in which they apply the deduction, which will be calculated in the same terms as the Net Tax Profit Account. For purposes of calculating the account, instead of considering only the net tax profit for the year, the profit for investment in renewable energies for the year could be added with the increase of the deduction, thus resulting in an additional balance of after-tax dividends. The calculations are done according to rules set out in the law.
Taxpayers exclusively engaged in the generation of energy from renewable sources or efficient electricity cogeneration systems are considered to be those whose income from such activities represents at least 90% of their total income, without including income from the sale of fixed assets and land owned by them that have been used for their activity.
In terms of ESG, these incentives encourage investment in environmentally friendly activities.
Local environmental taxes
Some Mexican states have taxes intended to discourage companies from damaging the environment.
In general, local tax applies to individuals or companies established in a state, whose activities emit gases into the atmosphere, pollutants into the soil, subsoil or water, or deposit waste or extract materials. A person releasing pollutants into the environment within the territory of each state must register in the state taxpayer registry, determine the amounts of pollutants for each activity and pay the corresponding tax.
Which Mexican states have eco-taxes?
• Baja California
• Estado de México
• Nuevo León
• Quintana Roo
These measures, imposing additional taxes on companies that carry out activities damaging the environment, aim to discourage these activities and encourage the use of renewable energy.
In order to promote environmental sustainability and eco-friendly practices, Portugal has implemented several green taxation measures including vehicle taxes based on emissions.
According to the Portuguese Vehicle Tax (Imposto Sobre Veículos – ISV) rules, carbon emissions are taken into account when calculating taxes for vehicles. This encourages consumers to choose vehicles with lower emissions.
ISV is payable on the registration of motor vehicles. As for its environmental component, less ISV tax is payable for vehicles with lower emissions. Certain categories of vehicles can be ISV-exempt (e.g. 100% electric vehicles).
In addition to tax exemption on registration, companies that use electric vehicles may deduct certain expenses related to these vehicles. These can include vehicle purchase costs, as well as maintenance, and charging infrastructure costs.
From 1 January 2023, the cost of electric vehicles will be subject to autonomous taxation at a rate of 10% when the purchase cost exceeds EUR 62,500. Below this threshold, no autonomous tax applies.
In order to promote ESG measures, the Portuguese government has introduced incentives to encourage more employees to cycle to and from work, through the implementation of the ‘cycle-to-work’ scheme.
This scheme exempts benefits in kind arising from the provision of a bicycle/bicycle safety equipment by an employer to an employee from income tax, provided that the bicycle/associated safety equipment is used by the employee primarily for eligible journeys.
A limit of EUR 1,000 applies to the purchase of a bicycle and/or bicycle safety equipment by the employer and only one entitlement applies per employee over a period of 5 years. A salary sacrifice agreement will be in place for a maximum period of 12 months and the employee will not be subject to tax, PRSI or levies on the salary foregone.
Hiring people with disabilities
The Law on the Rights of Disabled People establishes a right to equality of opportunity and treatment for people with disabilities (i.e. as for other citizens).
For this purpose, a series of incentives and tax benefits aimed at promoting the creation of employment for people with disabilities have been introduced. For example, a company that hires someone with a disability on an indefinite-term basis can deduct between EUR 4,500 and EUR 6,300 in Social Security contributions, to which it can add another deduction of up to EUR 12,000 if it creates a new position for the hire.
In terms of ESG, these measures promote the integration of people with disabilities into the workforce and guarantee equal opportunities for citizens regardless of their personal circumstances.
Deductions for employment creation
Entities that hire their first employee on an ‘employment contract for an indefinite period of time to support entrepreneurs’, may deduct EUR 3,000 from their total tax liability if the employee is under 30 years of age.
In addition, entities that have a workforce of less than 50 employees at the time they establish ‘employment contracts for an indefinite period of time to support entrepreneurs’, may deduct from the total tax liability 50 percent of the lesser of the following amounts:
In terms of ESG, these measures promote job creation and aim to reduce long-term unemployment.
Accelerated depreciation of electric vehicles and new recharging infrastructure
In order to promote the use of renewable energies and the electrification of mobility over the use of fossil fuels, a series of tax incentives have been introduced in 2023.
The law establishes that investments in certain types of new electric vehicles that come into operation in tax years 2023, 2024 and 2025 may have depreciation applied at twice the usual rate. Investments in new electric vehicle recharging infrastructure, whether of normal or high power, that come into operation in the 2023, 2024 and 2025 tax years may have depreciation applied in the same way, if certain conditions are met.
Accelerated depreciation allows companies to deduct a greater amount of depreciation expense in the early years of an asset’s useful life. In terms of ESG, the fact that companies can apply this accelerated depreciation allows them to invest in more environmentally friendly electric vehicles because of the significant savings this brings, when compared to vehicles powered by fossil fuels.
Depreciation exemption for investments that use energy from renewable sources
Investments in facilities for generating electricity from renewable sources for own use, and in installations for heating and for own consumption that use energy from renewable sources, which replace installations that use energy from non-renewable fossil fuel sources, may be fully deducted in the tax periods beginning or ending in that year if certain requirements are met.
In terms of ESG, these measures promote the use of renewable energy.
Ultra Low Emissions Vehicles (ULEV)
It is relatively common in the UK for employers to offer employees the opportunity to have a company car for their private use. From a tax and social security (national insurance contributions or ‘NICs’) perspective, having a company car for private use is a benefit in kind on which the employee is subject to income tax and the employer is subject to employer NICs. The amount of the benefit is (broadly) calculated by reference to the manufacturer’s list price of the car when new (including any optional extras, delivery charges and VAT) multiplied by a stated percentage depending on the car’s CO2 emissions. The maximum percentage is currently 37%.
To encourage employees to select electric and certain hybrids cars with ultra low emissions (i.e. CO2 emissions of below 75g for every kilometre travelled) the stated percentage is significantly reduced. For all electric vehicles it is currently 2% (and will remain so until at least April 2025) and for hybrids it is currently between 2% and 14%, depending on CO2 emissions and the electric-only range of the vehicle.
The ULEV policy has proved hugely popular and there has been a significant increase in the number of electric cars on UK roads as a result.
To further encourage the use of electric and hybrid cars, the provision of electric charging points at or near the workplace, as well as the electricity provided through workplace charging points, is exempt from income tax and NICs.
Cycle to work
To encourage both CO2-free commutes and employee well-being, employers may provide employees with a bicycle and associated cycling equipment to allow employees to cycle to work, tax and NIC-free.
For the cycle to work exemption to apply, several conditions must be met:
Often ULEV car schemes and cycle to work benefits are offered to employees in conjunction with a salary sacrifice arrangement. A salary sacrifice arrangement increases the tax efficiency of these benefits.
Under a salary sacrifice arrangement, the employee gives up or ‘sacrifices’ gross pay in return for an ULEV or cycle and/or equipment under a cycle to work scheme. This has the advantage of saving the employee tax and employee NICs on the amount sacrificed and saving the employer the employer NICs on the amount sacrificed.
Under Ukrainian tax legislation, there is a list of organisations or enterprises that are exempt from paying tax. Enterprises and organisations founded and owned by public associations of people with disabilities are, in general, exempt from taxation. Access to this benefit depends on the grant of a permit by the Ministry of Social Policy of Ukraine. This measure encourages the establishment of these organisations, and their activities, and contributes to the ‘social’ aspect of ESG.
Until 1 January 2027, the import of waste and a scrap metals, as well as paper and cardboard for disposal is exempt of VAT. The list of materials covered by the scheme is issued by the Cabinet of Ministers. Similar export operations are also exempt from VAT.
This promotes the environmental part of ESG as it encourages the proper processing of metal and paper waste.
Find out how ESG issues are shaping policy and practice in other areas of employment law