Car taxes and company car expenses in Estonia: what every entrepreneur should know

Key points:

Using cars for business purposes is one of the most common and, at the same time, most problematic areas of Estonian accounting. While entrepreneurs often perceive cars as ‘work tools’, from the perspective of Estonian tax legislation, they automatically fall into the category of potential personal benefit. This means they are subject to special control.

The situation will become even more sensitive in 2025–2026 when new taxes are introduced and attention to company expenses increases, meaning errors in car accounting will lead to additional charges. This is why the issue of car expenses cannot be put off or decided on intuitively.

Company car vs owner’s car: a fundamental difference

The first thing to understand is that the tax regime depends directly on who owns the car and how it is used. In Estonia, there is a clear distinction between the following situations:

• The car belongs to a company (OÜ)
• The car belongs to a private individual but is used for business purposes
• The car is used for both work and personal purposes

Each of these models has different tax implications, and attempts to mix them without proper accounting almost always lead to problems.

What does it mean in practice to have a car on the company’s balance sheet?

When a car is registered to a company and recorded in the accounts as an asset, all expenses related to it are automatically subject to tax control. This applies to:

• purchasing or leasing a car;
• fuel;
• insurance;
• maintenance;
• repairs;
• parking and road tolls.

The key question that the tax authorities always ask is: Is the car used exclusively for business purposes, or for personal use too?

Personal use of a company car incurs fringe benefits tax

If a company car is used for personal purposes by the owner, director or employees, a fringe benefit arises. In this case, the company is obliged to:

• charge tax on the fringe benefit;
• pay income tax;
• pay social security tax.

The amount of the fringe benefit is calculated monthly based on the vehicle’s engine power if personal use is permitted.

Special benefit for a car

Indicator	Value
Fringe benefit base	€1.96 per kW per month, or €1.47 per kW for a car older than five years
Income tax	22%
Social tax	33%
Frequency	Every month

If a company claims that a passenger car is used exclusively for business purposes, it must be able to demonstrate that private use is excluded.

How to avoid special privilege tax

To avoid fringe benefit taxation, the company must ensure and be able to demonstrate that the vehicle is used exclusively for business purposes. A travel log may be used as supporting evidence, but it is not the only possible form of proof.
In practice, this is possible, but it requires discipline. Most entrepreneurs eventually abandon this model because the administrative burden is too high.

Using a personal car for business

An alternative option is for the owner or an employee to use their personal car for the benefit of the company. In this case, the car is not on the company’s balance sheet and expenses are reimbursed.

For the use of a personal passenger car for business purposes, tax-free compensation may be paid under the statutory mileage compensation rules and applicable limits, provided the required records are maintained.
This option is often more tax-efficient, especially for small businesses and sole traders.

VAT and car expenses

The issue of VAT on cars is one of the most complex. For a passenger car used for both business and private purposes, the deduction of input VAT is generally limited to 50%.

If a passenger car is used exclusively for business purposes, 100% of input VAT may be deductible if the statutory conditions are met. If it is also used privately, input VAT deduction is generally limited to 50%, subject to the applicable VAT rules.
Errors in VAT accounting for vehicles are one of the most common reasons for adjustments to KMD declarations.

From 2025, Estonia introduced an annual motor vehicle tax.

From 2025, an annual motor vehicle tax applies in Estonia and is payable by the person liable for the tax under the Motor Vehicle Tax Act. If the car is registered to a company, the company will pay the tax.

If paid by the company, it is considered an expense and affects the total cost of owning a car.

Although the motor tax itself is not a corporate income tax, it increases a business’s fixed costs and must be taken into account when choosing a car model.

Common mistakes made by entrepreneurs

In practice, the same problems are most often encountered:

• The company car is used for personal purposes without special allowances being charged; there are no travel logs, or the logs are just formalities
• VAT is deducted without justification; personal and corporate expenses are mixed; and the accountant receives incomplete information about the use of the car.

All these mistakes have one thing in common: they become apparent at the very first inspection.

Why are cars a high-risk area for OÜs?

A car is an ideal object for tax control:

Expenses are regular and easily comparable. They are often used for personal purposes and are perceived by entrepreneurs as ‘obviously work-related’.

This is why tax authorities pay close attention to this issue, especially in companies with a single owner and director.

Our recommended approach to cars in business

From a sustainable accounting point of view, there are three working principles:

• Choose the car usage model in advance, not after the event.
• Document everything related to travel and expenses.
• Do not optimise ‘on a wing and a prayer’, especially when the tax burden is increasing.

A correctly chosen scheme is almost always cheaper than correcting mistakes retroactively.

In Estonia, a company car is not just a means of transport, but a fully fledged tax liability. Following the introduction of motor vehicle tax in 2025, incorrect accounting for company cars may result in additional tax liabilities and compliance risks.

For entrepreneurs, this means one simple truth: if you have a company car, it must be accounted for correctly. Here, accounting plays a key role in protecting the business not only through calculations, but also by shielding it from unnecessary tax risks.