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Compensation paid for the use of a personal passenger car (automobile)

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.

When can tax-free compensation be paid for rides between place of work and residence?

Generally, rides between the place of work and the residence are not considered as business rides related to business (job rides) and these cannot be reimbursed tax-free, under certain conditions this is however still possible. Rides between the place of work and the residence can be considered to be business rides (job rides), if it is not possible to use public transport to reach the destination within a reasonable time and with a reasonable cost. The same applies, if the residence of the employee working based on an employment contract, is located at least 50 kilometres from the place of work (§ 48 (51) of the Income Tax Act). In those cases, journeys between pleace of work and the residence are indicated thusly in the logbook and these journeys can be reimbursed tax-free in the extent of the general limit (335 euros).

Disabled person can be reimbursed, within the prescribed limits, for rides between residence and place of work, if these rides were kept records (has a logbook) and it is not possible to use public transportation of if the use of public transportation would significantly reduce the person’s ability to move and work.

Rides from home to work and back cannot be reimbursed tax-free due to the reason that it is easier and more convenient for a person to drive between home and work by private passenger car than by using public transportation.

Rides between the place of residence and the place of work can be compensated tax-free, if it is primarily necessary for the employer to perform its activities. This means that the employer’s interest in reimbursing travel between home and work generally prevails and the employer must be able to justify this interest, if necessary. The payment of compensation must be assessed separately for each person, depending on the person’s place of residence, work obligations, start of the working day, possibilities to use public transportation, etc. Having assessed all these factors together, the employer can decide whether or not it is justified to provide tax-free compensation for travel from home to work and back.

Example

An agreement has been concluded with the employee that the employee is ready 24/7 (on-call time) to solve problems arising in the course of business, so-called "crisis situations". Can rides between work and home then be considered as a rides related to business (work rides)?
On-call time is time when the employee is not obligated to perform work duties but is required to be ready to perform work duties, if the employer has given an order under the agreed conditions. As the employee is not able to fully concentrate on rest during on-call time and must be ready to perform work duties immediately, if necessary, then it is justified that the employee is paid 1/10 of the agreed wages for on-call time. On-call time can only be implemented if agreed between the employee and the employer.
Thereby, crisis management (on-call time) is business-related, as are job rides outside the daily place of work and back. In this case, rides between home and work is considered to be work rides. However, it must be borne in mind that imposing a purely formal obligation on employees to deal with crises does not entitle them to tax-free compensation for all rides between work and home. Such an obligation must be substantive, based on real needs of the employer and also correspond to the duties of the employee. Additional information on organising transport of employees can be found in the instruction "Transportation of employees to work and back home pursuant to § 48 (5¹) of the Income Tax Act" (in Estonian).

Declaration of compensation

Resident legal person, state agency or local government agency, sole proprietor and a non-resident with permanent establishment registered in Estonia or a non-resident acting as an employer, who has paid compensation to a natural person for the use of a car during a calendar year (incl. a disabled person) is required by 1 February of the following year (INF 14 will be submitted by 1 February 2021 for the year 2020) to submit declaration INF 14.

To submit form INF 14:

  1. enter the e-MTA
  2. select the section "Reports" and select "INF 14" from the list
  3. on the page listing the declarations, press the button "Add new declaration"
  4. choose "Quarter 4"

Form INF 14 shall declare the amounts compensated, indicating also the part exceeding the prescribed limit.

Example 1

The order of the employer states that the employee shall be compensated work rides for the use of a personal passenger car if the employee is keeping a logbook. During the month of January, the employee was reimbursed for the use of a personal passenger car in the total amount of 400 euros (1,333 km x 0.3 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 65 euros (400 – 335) and in form INF 14 – the amount of 400 euros.

Example 2

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks in the amount of 335 euros. No logbook is kept. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
Nothing shall be declared in Annex 4 of form TSD or form INF 14, as no logbook has been kept. The amount of 335 euros is considered the income from employment (wage income) and it shall be declared in Annex 1 of form TSD.

Example 3

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of February, the employee was reimbursed for the use of a personal passenger car in the total amount of 335 euros (744.44 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 111.67 euros (744,44 km × 0.15 euros) and in form INF 14 – the amount of 335 euros.

Example 4

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of March, the employee was reimbursed for the use of a personal passenger car in the total amount of 675 euros (1,500 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 340 euros (675 – 335) and in form INF 14 – the amount of 675 euros.

29.03.2021