The amendment to the Income Tax Act, which has been discussed for many years, has become a reality and will enter into force on 1 January 2018. From next year, the opportunity to keep a log book for the company car which is also used for personal rides and to make only the private rides taxable, will become invalid.
Company car tax – new principles
From 1 January 2018, company cars also used for personal rides will be taxed depending on their power and age. Article 48 (8) of the Income Tax Act stipulates that in case of enabling the use of a company car in the possession or ownership of the employer for activities not related to work, employment or service duties or to the employer’s business, a fringe benefit tax must be paid in the amount of 1.96 euros per wattage unit (kW) of the vehicle’s engine, as registered in the traffic register. For cars older than 5 years, the fringe benefit per wattage unit (kW) of the vehicle’s engine is 1.47 euros. Fringe benefit will not apply during taxation period when the vehicle has been temporarily deleted from the traffic register or when the registration is suspended.
The new car tax system also enables the use of the same kilowatt-based fringe benefit calculation for vans (category N1). If there is no wish to apply the kilowatt-based, the taxation of a company car in business and private use must be based on market prices, which in some cases may be significantly higher compared to the new system. Finding a market price is definitely more complicated than a kilowatt-based calculation, and also, there might be the need to justify such calculations during the tax audit.
During the last six months, we have been asked at least once a week what is the reasonable thing to do? There is no right answer to this question. The right answer depends on the following circumstances:
- the number of kilowatts of the vehicle,
- average mileage per month,
- average cost of the car per month.
The options of the employer are as follows:
- not allow private use of the company car;
- pay the fringe benefit for the company car on kilowatt-basis;
- waive from company vehicles and compensate employees for work rides made with a private car (335 euros per month is tax-exempt on the basis of the log book).
In case the company car is registered as a mixed use vehicle, the decision shall apply for at least one year and during that time the use of the car cannot be changed. If the company car is not used for private purposes, i.e. it is used only for business rides, a respective note must be made in the traffic register. If this is not done, the car is considered to be in mixed use. In the case of a vehicle used exclusively for business purposes, the employer may, in the future, maintain detailed records (log books) or use other evidence accepted by the tax authority to prove of the absence of private rides. The Estonian Tax and Customs Board has also promised to issue respective instructions (at the moment of publication of this blog, this has not been prepared yet). In addition, the obligation to pay fringe benefit for a car shall be suspended in cases where the car is temporarily not used at all or has been temporarily deleted from the traffic register.
100% VAT can be deducted only if the vehicle is used exclusively for business during a continuous period of 2 years. If the car was acquired solely for business use and the input VAT was deducted in its entirety, but during the period of two years, the car will also be used for private purposes, the input VAT deducted shall be repaid to the state at 50%. In addition to VAT, interests must also be paid. It is pretty complicated to predict the use of company’s assets for the next two years. As a comparison, it can be mentioned that it is even pretty complicated to predict our tax system over a few months.
Who will benefit from this amendment to the car tax?
The new car tax system will definitely be more convenient to the Estonian Tax and Customs Board, because the new system enables to collect and control the taxes more easily. On average, the amendment is financially beneficial to companies, who were already paying fringe benefit from vehicles, but the number of kilowatts of their vehicles is smaller than 130KW or their car park for more powerful vehicles is older than 5 years. However, the amendment brings more work to accountants, who need to keep records over the power and age of the vehicles.
If you still have questions about what to do with your company vehicles, we recommend to contact your accountant who will explain you the new valid procedure.