Toyota, which had topped sales for the past four years, sold 10.175 million vehicles globally in 2016, figures show.
This is the first time that Toyota has lost the crown since 2011, when the company was hit by supply chain disruptions caused by a massive natural disaster that led to a tsunami in Japan's north-eastern region.
U.S. auto giant General Motors (GM) has yet to report its tally next week, but appears unlikely to overtake its two rivals.
The news surprised many analysts too, as Volkswagen have had to recall millions of vehicles because of the emissions cheating scandal that the business accepted and later settled in U.S. courts by paying a steep compensation.
VW agreed this month to plead guilty to fraud and pay fines amounting to $4.3 billion in the United States to close its emissions cases with the Department of Justice.
"The development of the USA market is set to decide if VW can stay ahead of Toyota this year", a Frankfurt-based analyst at Commerzbank told Bloomberg.
Watching Volkswagen and Toyota fight it out for the title of world's best-selling automaker has become a bit of a spectator sport in recent years. The CEO, ousted in late 2015 after word of the diesel emissions rigging became public, had originally hoped to become the world's automotive sales leader by 2018. That fell short of VW Group's record 10.3 million cars, trucks and buses, a 3.8 percent gain.
Although it has taken a decade, Volkswagen has clearly dethroned Toyota as the world's largest carmaker.
Sales plunged 34 percent in Brazil and slipped almost three percent in the USA while gaining four percent in Europe. Toyota Motors lost out in 2011 following the disturbance caused by tsunami and the quake that hit Japan that year. VW group also includes the brands Audi, Porsche and Skoda. Last year, it came in third place.
"At Toyota, we are not focused on chasing volume".
Despite losing the crown to VW, Toyota remains the envy of the global auto industry for its tremendously efficient production and strong profit margins.
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