According to the special company car taxation rules in Estonia, the employer’s enabling use of a car (category M1 or M1G) for activities not related to business will be subject to fringe benefits. Income tax and social tax on fringe benefits are calculated according to engine power and the age of a car. For more information about taxation, please click here.
According to the Estonian Income Tax Act, the price of a fringe benefit for enabling the use of a car in the ownership or possession of the company for activities not related to employment or to the employer’s business is EUR 1.96 per month for an engine power unit (kW) of the car as indicated in the motor register. In the case of an automobile older than five years, the price of a fringe benefit is EUR1.47 for an engine power unit (kW) of the car. As the taxation is kept solely on a monthly basis and a car-by-car basis, then in certain cases a change of a car may lead to double taxation.
To illustrate the above, please see the example below. The company uses a car (category M1, the year 2014, 128 kW), which is also used for private trips. Thus, the company has to pay a total of EUR 124.66 of income and social tax monthly from the car (128 * 1.47 = 188.16 € is the tax base of the fringe benefit, so income tax has to be paid in the amount of 47.04 € and social tax 77.62 €). The company sells the old car at the beginning of the month and buys a new car in the middle of the same month (category M1, the year 2020, with a power of 140 kW). The tax liability related to the new car is a bit higher because the new car is more powerful. The monthly tax obligation for the company will be EUR 205.80. However, please note, that the tax return for the month of the replacement of the car must declare taxes for both the new and for the old car, as the law does not allow to keep the calculation in proportion with the actual use. Thus, based on the example given, a total of EUR 330.46 (124€ + 205.80€) of income and social tax must be declared on the tax return, when the car was replaced.
As described the replacement of the company car may cause unexpected tax obligations. Therefore, we recommend taking into account also tax nuances early in the planning phase while considering the change of the company car. Leinonen tax team would be at your service in order to make tax-efficient choices. Please do not hesitate to contact us at your convenience.
