Payment of compensation for the use of a personal car

The article explains the conditions under which an employer can pay an employee tax-free compensation for the use of a personal car.

Who can receive tax-free compensation?

Based on the procedure established on 14.07.2006 by Government of Republic Regulation No. 164 compensation can be paid for the use of a passenger car for work-related trips:

to an official (based on the Income Tax Act, including also the persons specified in § 2 (3) of the Public Service Act , such as a member of the council of a local government unit, a member of a municipality or city government, a judge, a member of the Parliament, etc.)
to the employee (within the meaning of the Employment Contracts Act ) and
to a member of the management or control body of a legal entity ( within the meaning of § 9 of the Income Tax Act ).

Therefore, for example, a tax-free compensation cannot be paid to the owner of a company or a person providing a service based on a contract under the law of debt based on the aforementioned regulation. If the expenses are documented, it is possible to reimburse the interest of a legal entity on the basis of § 12 (3) of the Income Tax Act.

For which vehicle can tax-free compensation be paid?

Compensation can be paid for the use of a car that is not owned or possessed by the employer. Therefore, the car does not have to be the personal property of the user, but the right to use it must be proven. The right of use is fixed either on the vehicle’s registration certificate or in a power of attorney drawn up by the owner. Cars considered as passenger cars are M1 and M1G category vehicles.

If the benefit is paid to a disabled person, as an exception the costs of using any motor vehicle may be reimbursed. According to § 2 of the Traffic Act, a motor vehicle is considered to be a vehicle powered by an engine. A vehicle is a means of transport intended for use on the road which moves with the help of an engine or other power.

What are the basic documents required for the payment of tax-free compensation?

In order to pay the compensation, there must be a formal written decision, directive or order from the employer, which shows the details of the person receiving the compensation, the amount of the compensation and the date of the trip or the period during which the trips made are compensated. A copy of the document certifying the right to use the car is attached to the written decision. The decision can also be made for a longer period than one calendar month.

Tax-free compensation can only be paid if a record is kept of business trips, i.e. a driving log. The driving logbook must contain the data of the person using the car, the data of the national registration plate of the car, the initial and final readings of the odometer for each business trip, and the date and purpose of the trip for each trip. The form in which the logbook is kept, e.g. on paper or electronically, does not matter – it is important that it contains the above-mentioned data. As a result, tax-free compensation cannot be paid for future journeys, but only for journeys already made.

If the compensation for the use of a personal car is paid without keeping records, the payment is in the form of salary income, which must be declared individually on the form TSD in Appendix 1 (in the case of a non-resident, in Appendix 2 ).

Tax-free allowance limits

On the basis of the driving logbook, business trips can be reimbursed up to 30 cents per kilometer , but not more than 335 euros for trips made in one calendar month . This means that the employer can also set a lower price per kilometer, e.g. 20 cents, but neither limit must be exceeded in order to fulfill the condition of tax exemption. Therefore, if the price per kilometer of the compensation is set at, for example, 1 euro, the part that exceeds the limit price per kilometer is taxable, i.e. 70 cents, regardless of the total amount of the compensation.

Payment of aggregated compensation for the use of a personal car

The compensation can also be paid to the employee in aggregate, i.e. more than 335 euros per cash register in one calendar month, but it is important that the compensation is not calculated in excess of the prescribed limit for one month.

The compensation amount exceeding the limits is considered a special benefit. If the calculated benefit amount is greater than the limit for a calendar month, the special benefit is calculated for each month separately and the special benefit must be declared in the month when the benefit was paid out.

If there is a record, a natural person can receive tax-free compensation from several employers, while the upper limit of 335 euros is applied separately for each employer. The compensation includes all expenses related to the normal use of the car (including fuel, parking, etc.), except for the parking fee paid when performing service, work or official duties.

The price per kilometer and the tax-free limit established in the regulation are not related to actual costs (cost documents). Section 12(3) of the Income Tax Act states that the income of a natural person is not compensation for documented expenses incurred for the benefit of another person, but it also adds that this paragraph does not apply to compensation for which separate conditions and limits have been established. Since separate conditions and limits have been established for the compensation paid for the use of a personal car, the compensation is based on expense documents (e.g. payment of a tire change, current repair costs, etc.) and is a special benefits (TuMS § 48 and Regulation No. 2 of the Minister of Finance of 13.01.2011 “Procedure for determining the price of a special benefits § 6 ). With exception of the parking fee paid during the performance of service, work or professional duties.

As an exception, the expenses of a personal car can be reimbursed on the basis of an expense document, if you go on a business trip with a personal car and the reimbursement of these expenses is based on the so-called business trip regulations: Regulation No. 110 of the Government of the Republic of 25.06.2009 or Regulation No. 112 of the Government of the Republic of 19.12.2012 .

When is reimbursement for travel between work and residence tax-free?

Journeys between work and residence are not considered business trips and cannot be compensated tax-free, but it is still possible if certain conditions are met. Trips between home and workplace can be treated as business trips, if it is not possible to cover this journey using public transport with a reasonable cost of time or money. If the residence of the employee is located at least 50 kilometers away from the workplace (TuMS § 48 subsection 5 ¹ ). In this case in the log book as the purpose of the trip is shown as trips between work and residence and they can be reimbursed tax-free up to the general limit (335 euros).

A person with a disability can be reimbursed for trips between home and workplace within the limits, if records are kept about them and if it is not possible to use public transport or if its use causes a significant decrease in the person’s ability to move and work.

Trips from home to work and back cannot be reimbursed tax-free on the grounds that it is easier and more convenient for a person to drive between home and work in a personal car than to use public transport.

It is possible to reimburse travel between home and workplace tax-free if it is primarily necessary for the employer to operate its business activities. This means that the employer’s interest is important when compensating for trips between home and work, and the employer must be able to justify the necessity. The payment of compensation to each person must be assessed separately based on the person’s place of residence, work duties, start of the working day, opportunities to use public transport, etc. By evaluating all these circumstances together, the employer can decide whether tax-free compensation for the person’s trips from home to work is justified or not.

Question: If there is on-call agreement with the employee that they are ready 24/7 (on-call) to solve problems arising in the course of business, i.e. crisis situations. In this case, can trips between work and home be considered business trips?

Answer : On-call time is the time when the employee is not obliged to perform work duties, but is required to be ready to perform work duties on the basis of the employer’s order under agreed conditions. Since the employee cannot fully concentrate on rest during the on-call time and must be ready to perform work tasks immediately if necessary, it is justified to pay the salary for the on-call time in the amount of 1/10 of the agreed salary.

On-call time can be implemented by agreement between the employee and the employer. Therefore, solutions to crisis situations (on-call time) are related to business, as well as trips outside the place of daily work for work purposes and then back there. In this case, journeys between work and home are considered business journeys. However, attention must be paid to the fact that merely formally imposing the obligation on employees to regulate crisis situations does not give the right to tax-free compensation for all journeys between work and home. Such an obligation must be substantive, based on the employer’s real needs and also correspond to the employee’s duties. You can find additional information on the organization of employee transportation in the instruction ” Employee transportation to and from work pursuant to § 48 subsection 5¹ of the Income Tax Act “.

Declaration of compensation

A resident legal entity, state institution or local government unit institution, self-employed employer and non-resident owning a permanent place of business in Estonia or acting as an employer, who has made compensation payments to a natural person for the use of a car during the calendar year (including to a disabled person), is required to submit declaration INF 14 by February 1 of the following year.

Steps to submit the form INF 14:

log intoe-MTA
select the section “Reports” and select “INF 14” from the list
on the list of declarations page, press the button “Add new declaration”
select the “IV quarter”

On form INF 14, the compensation amounts are declared together with the part exceeding the limit.

Question 1 : The employer’s order states that the employee will be reimbursed for the use of a personal car for work tasks while keeping a driving log. In January, the employee was reimbursed for the use of a personal car in the total amount of 400 euros (1333 km x 0.3 euros) and the same amount was also transferred to the employee. What amount must be declared on TSD Annex 4 and INF 14?

Answer : The amount of 65 euros (400 – 335) must be shown on Annex 4 of the TSD form and the amount of 400 euros on the INF 14 form.

Question 2 : The employer’s order states that the employee will be reimbursed for the use of a personal car on work assignments in the amount of 335 euros. No logbook is kept. What amount must be declared in Annex 4 of the TSD and on the INF 14 form?

Answer : Nothing is declared in Annex 4 of the TSD form, INF 14, because the logbook has not been kept. The amount of 335 euros can be treated as salary income and is declared in Appendix 1 of the TSD form.

Question 3 : The employer’s order states that the employee is reimbursed for the use of a personal car for work tasks while keeping a driving log. In February, the employee was reimbursed for the use of a personal car in the total amount of 335 euros (744.44 km × 0.45 euros) and the same amount was also transferred to the employee. What amount must be declared in Annex 4 of Form TSD and Form INF 14?

Answer : The amount of 111.67 euros (744.44 km × 0.15 euros) must be shown in Annex 4 of the TSD form and the amount of 335 euros on the INF 14 form.

Question 4 : The employer’s order states that the employee is reimbursed for the use of a personal car for work tasks while keeping a driving log. In March, the employee was reimbursed for the use of a personal car in the total amount of 675 euros (1500 km × 0.45 euros) and the same amount was also transferred to the employee. What amount must be declared in Annex 4 of Form TSD and Form INF 14?

Answer : The amount of 340 euros (675 – 335) must be shown in Annex 4 of the TSD form and the amount of 675 euros on the INF 14 form.