Taxation of Car Compensation and Fringe Benefits in Estonia
In the Estonian tax system, benefits provided by an employer to an employee are strictly regulated. When an employer allows an employee to use a company car for private purposes, it constitutes a fringe benefit under § 48 (4) 1) of the Income Tax Act (TuMS).
Taxation of Fringe Benefits
A fringe benefit is any good, service, or monetary value provided by an employer to an employee that can be measured in monetary terms. If a company car is used for private trips, it is subject to income tax and social tax. The value of the fringe benefit is calculated based on the vehicle's power (kW). Since 2018, the taxable value is 1.96 euros per kilowatt per month.
Key points to consider:
- Income Tax: The employer pays income tax at a rate of 20/80 on the grossed-up value of the benefit.
- Social Tax: The employer pays social tax at a rate of 33% on the grossed-up value of the benefit.
Car Compensation and Mileage Logs
If an employee uses their personal vehicle for business-related trips, the employer may pay compensation tax-free. According to § 13 (3) 2) of the TuMS and government regulations, the tax-free limit is 0.30 euros per kilometer, up to a maximum of 335 euros per calendar month. To qualify, a proper mileage log must be maintained to prove the business nature of the trips. Failure to maintain a log results in the entire compensation being treated as a taxable fringe benefit.
Conclusion
Proper documentation is essential to avoid tax disputes. If you require a detailed analysis of your company's vehicle policy or wish to ensure your compensation system complies with current legislation, please contact us. Our experienced lawyers at Legal Aid 24 are ready to assist you. Ask our advanced legal AI assistant for a personalized analysis of your unique situation today!