Below, we will explain the conditions under which an employer is able to pay a tax-free compensation to an employee for the use of a personal passenger car.
To whom tax-free car compensation can be paid?
The procedure established in Government of the Republic Regulation No. 164 of 14 July 2006 (hereinafter Regulation) allows compensation to be paid for the use of a passenger car for business trips to:
an official (within the meaning of the Income Tax Act, an official is also considered to be a person specified in § 2 (3) of the Civil Service Act, such as a member of a local government council, a member of a rural municipality or city government, a judge, a member of the Riigikogu, etc.);
an employee (within the meaning of the Employment Contracts Act); and
a member of the management or control body of a legal person (within the meaning of § 9 of the Income Tax Act).
Thus, the owner of a company or a person providing a service by a contract under the law of obligations, cannot be granted a tax-free compensation under this regulation. However, they may be reimbursed for expenses incurred in the interests of a legal person pursuant to § 12 (3) of the Income Tax Act, if these expenses are documented.
Which vehicle can tax-free car compensation be paid on?
Compensation can be paid for the use of a passenger car that is not owned or possessed by the employer. Thus, the passenger car does not have to be in the personal possession of the person using it, however, the right to use the vehicle must be proven. The right of use is fixed either on the vehicle registration certificate or in a power of attorney prepared by the owner of the vehicle. Vehicles of categories M1 and M1G are considered to be passenger cars.
Exceptionally, if the benefit is paid to a disabled person, the costs of using any motor vehicle can be compensated. According to § 2 of the Traffic Act, a motor power-driven vehicle is a vehicle that is powered by an engine. Vehicle is a device powered by a motor or in another power, designated for road traffic or driving on the road.
What are the source documents required for the payment of the tax-free car compensation?
Payment of the compensation requires a written decision, directive or order of the employer stating the identity of the person receiving the compensation, the amount of the compensation and the date or period during which the reimbursed rides have been made. Copy of the document certifying the right to use the car shall be attached to the written decision. The decision may also be made for a period longer than one calendar month.
It is possible to pay tax-free compensation in case the rides are related to business (work rides) and about the rides are kept records or company has a logbook.
The logbook must contain data on the person using the passenger car, the vehicle’s registration plate data, the initial and final read-out of the odometer for each business ride, the date and purpose of each ride. It is not important whether the logbook is kept on paper or electronically – it must however contain the above-mentioned information. Consequently, the tax-free compensation cannot be paid for future rides, but only for past rides.
If the personal passenger car´s compensation has paid without keeping records (without the logbook), then the payment is considered as wage income, which must be declared by company in a personalised manner on Annex 1 of form TSD (on Annex 2 of form TSD if the recipient of car´s compensation is a non-resident).
Limits on tax-free car compensation
The logbook can be used as a basis for compensating business rides in an extent of up to 30 cents per kilometre, but for no more than 335 euros for rides made in one calendar month. This means that the employer may also set a lower price per kilometre, such as 20 cents, but neither threshold may be exceeded in order to qualify for the payment of tax-free compensation. Thereby, if the price per kilometre of compensation is set to be 1 euro, the taxable part is the amount exceeding the price per kilometre, i.e. 70 cents, regardless of the total amount of compensation paid.
Compensation may also be paid to an employee summed up, i.e. more than 335 euros in one calendar month using cash-based principle, however, importantly, compensation per month must not exceed the prescribed monthly limit.
The amount of compensation in excess of the limit is considered to be a fringe benefit. If the amount of the calculated benefit exceeds the limit prescribed for a calendar month, the fringe benefit shall be calculated separately for each month and the fringe benefit shall be declared in the month in which the benefit was paid.
If the records are kept, a natural person may also receive tax-free compensation from several employers, the thereby limit of 335 euros shall then be applied separately for each employer. The compensation includes all expenses related to the normal use of the car (incl. fuel, insurance, etc.), except for parking fees paid while acting as an official, employee, or member of the management or controlling body of a legal person.
The price per kilometre prescribed in the regulation and the tax-free limit are not related to actual expenses (expenses documents). Although § 12 (3) of the Income Tax Act states that any compensation for certified expenses incurred for the benefit of another person shall not be deemed to be income of a natural person, then it is added that, the provisions of this subsection do not apply to compensations for which taxation separate terms, conditions and limits are established. Due to separate terms, conditions and limits having been established for compensation paid for the use of a personal passenger car, then the use of a personal passenger car (e.g. payment for tire change, current repair costs, etc.) is considered to be a fringe benefit (§ 48 of the Income Tax Act and § 6 of Regulation No. 2 of the Minister of Finance "Procedure for Pricing of a Special Discount" of 13 January 2011), except for parking fees paid for using the car related to job tasks official, employees or Member of Board.
Exceptionally, the expenses of a personal passenger car can be reimbursed based on an expense document if the business trip is taken on in a personal car and the reimbursement of these expenses is based on the so-called "business trip regulations": Government of the Republic Regulation No. 110 of 25 June 2009 or Government of the Republic Regulation No. 112 of 19 December 2012.