Compensation for vehicle use

Please note that as a customer we help you in everything related to taxation.

You can find more information about our accounting service here, and if you wish, you can leave a contact request using our form below, and we will contact you quickly.

Estonian article: Isikliku sõiduauto kasutaine.

Using a passenger car for work-related trips is a daily necessity for many officials and employees. To compensate for these expenses, the Government of the Republic has established Regulation No. 164 on 14.07.2006, which sets clear rules and restrictions. The regulation aims to ensure that work-related trips are properly documented and that compensation is paid to eligible persons according to the prescribed order and conditions. Tax-free car compensation can be paid to a company board member and an employee with an employment contract. This compensation does not extend to company owners or individuals providing services under a contract of obligations.

Compensation can be paid for the use of a passenger car that is not owned or possessed by the employer. The vehicle does not need to be the personal property of the user, but the right to use it must be proven. The right to use is recorded either on the vehicle’s registration certificate or in a letter of authorization from the owner/responsible user. Compensation can be paid for M1 and M1G category vehicles. Exceptionally, if compensation is paid to a disabled person, the costs of using any motor vehicle can be covered. According to the Traffic Act (§ 2), a motor vehicle is any vehicle moving by engine power. A vehicle is a means of transport intended for or moving on the road, driven by an engine or other power source.

For more information, visit the Tax and Customs Board’s website.

The basis for compensation is proper documentation. To compensate for work trips, a written decision, order, or directive from the employer must be drawn up, specifying the details of the person receiving compensation, the amount of compensation, and the dates or periods of the trips to be compensated. Additionally, a copy of the document proving the right to use the car must be attached. This requirement ensures that compensation is paid transparently and lawfully.

To receive compensation, a logbook must be kept, containing the details of the person using the car, the car’s registration number, the start and end odometer readings for each work trip, the date, and the purpose of the trip. The logbook can be kept on paper or electronically, as long as it includes all necessary information. Keeping a logbook ensures that all work trips are documented and transparent, allowing the employer and tax authority to verify the correctness of the compensation. The decision can be made for a period longer than one calendar month.

Tax-free compensation can only be paid based on the logbook, which must include the following information:
– Name of the person using the car;
– Car registration number;
– Start and end odometer readings for each work trip;
– Date and purpose of each trip.

Compensation can only be paid for trips already made, not in advance for future trips. Compensation paid without keeping records is treated as salary income and must be declared.

Based on the logbook, compensation can be paid at 30 cents per kilometer, but not more than 335 euros for work trips made in one calendar month. The employer may also set a lower kilometer rate, such as 20 cents, but to meet the conditions for tax exemption, neither limit should be exceeded.

The kilometer rate and tax-free limit set in the regulation are not related to actual costs (expense documents). An employee can make work trips with several vehicles, but the tax-free compensation limit per month is still 335 euros. An employee can receive tax-free compensation from multiple employers, with the limit of 335 euros per month applying separately to each employer. Compensation does not have to be paid monthly; it can also be paid for several months at once or at the end of the year for all months.

The amount of compensation exceeding the limits is considered a fringe benefit and must be declared in the same period as the payment. Compensation includes all costs associated with the normal use of the car, such as fuel, insurance, tire change, and maintenance. The recipient of the compensation does not need to submit any other expense documents to the employer besides the logbook.

In company expenses, the costs of the vehicle receiving compensation, such as fuel receipts or repair invoices, cannot be reflected tax-free. Exceptionally, personal car expenses can be reimbursed based on expense documents when going on a business trip.

In general, trips between work and home are not considered work trips and cannot be compensated tax-free. However, under certain conditions, this is possible. Trips between home and workplace can be considered work trips if it is not possible to make the journey by public transport within a reasonable time or cost, or if the employee’s residence is at least 50 kilometers away from the workplace (Income Tax Act § 48 section 51). In this case, the logbook can mark the purpose of the trip as trips between home and workplace, and they can be compensated tax-free up to 335 euros per month.

For a disabled person, the costs of trips between home and workplace can be compensated within the limit if records are kept and public transport cannot be used or its use causes a significant decline in the person’s mobility and workability.

Regular trips from home to work and back cannot be compensated tax-free with the justification that using a personal vehicle is more convenient than public transport. Compensation is only possible if it is necessary for the employer to operate. The employer must be able to justify why tax-free compensation is necessary. Each employee’s residence, job responsibilities, workday start time, and the possibility of using public transport must be evaluated separately.