For years, use of company cars for personal travel has been a problem for the tax authorities. From 2018, the related rules are once again becoming stricter and the personal travel in company cars will be more expensive.
Up to this year, the tax base for using a company car was EUR 256 a month, on which fringe benefit taxes (income and social tax) were EUR 169.90. Starting from the coming year, the tax base depends on the age and power (engine capacity) of the car. The tax base for each unit of engine capacity (in kW) for cars not older than 5 years is EUR 1.96 a calendar month, while for cars older than 5 years it is EUR 1.47 a calendar month.
Example: The tax base for a vehicle produced in 2015 with power of 180 kW is 1.96*180 = EUR 352.80. Income tax for each calendar month is EUR 88.20 and social tax is EUR 145.33. Total fringe benefit tax comes to EUR 233.72. However, tax for a newer car with engine power of 80 kW is EUR 103.88 a month.
If the car is used only for business travel, a special entry must be made in the Estonian Motor Register. Absence of this entry gives the tax authority a basis to assume that the car is used for private travel and should be taxed with fringe benefit taxes. Although keeping driving records is to be non-mandatory, the company must still be able to prove to the tax authority that the car is not used for private travel. Driving records can be used for this purpose. Having a separate parking lot for a company car as well as the existence of a personal car for the employee or management board member suggest that a company car is not used for private purposes.
A single “private meter” will create tax liability for the whole month. Kilometre-based compensation will apply to vans and (small) trucks.
The new rules will cause employers to consider whether it is reasonable to replace company cars with employees’ personal cars, for which tax-exempt compensation is payable, leading to a cheaper solution from the tax perspective. It also may prompt employees to review their tasks within the framework of which to cover company car costs without tax liability.