Are you look to buy a new car as an entrepreneur? Then please think thru this decision thru smartly. Without considering some important nuances, a new car may at one point end up being too costly tax-wise.

Personal car for business use

What to keep in mind when deciding to buy a new car a private individual and use that personal car for the benefit of your company?

For which car could tax-free compensation be paid? The vehicle does not have to be in personal possession of the user, but the right to drive must be proven. The right of use is established in either on the vehicle’s registration certificate or in a power of attorney that has been drawn up by the owner. M1 and M1G category vehicles are passenger cars.

Amount of tax-free compensation. As of 2014, compensation for the use of a personal vehicle for business purposes can be paid on the basis of distance driven, such as €0.30per km (€0.48 per mile), but not more than €335 per calendar month and from one employer only. The price per kilometre and the tax-free limit are not linked to real costs. The compensation for the use of a personal car (i.e. parking fees, tire change, casual repair costs, etc.) is a specific benefit and are reimbursed against expense claims, submitted by the employee.

As an exception, the costs of a personal car can be reimbursed against receipts if:

  • The private car is being used to drive to a business trip and reimbursement for these expenses are in accordance with the business tip reimbursement regulations.
  • Who can be reimbursed? – Reimbursement can only to be paid to a company’s employee (with whom an employment contract is in place) or a member of the management or control body of a legal person (accordance to § 9 of the Corporate Income Tax Law). Tax-free compensation cannot be paid to the owner of the company or to the person providing the service under the contract under the law of obligations.
  • Logging journeys – the condition for receiving the tax-free benefit is the logging of a travel journeys. The logbook can be kelp in Excel format, that contains the car registration number, odometer readings, the reason of travel and destinations. Only business trips can be recorded in the logbook. If no logbook is kept of records of journeys, the reimbursement for the use of the car should be paid as an additional sum to contracted a salary which must be declared by the person accordance to the Annex 1 of the TSD (Annex 2 in the case of a non-resident).

Decision of the management board – In order to pay out reimbursements, a written agreement of the employer must be drawn up, stating the recipient, the amount and also the period over (and reason for) which the expenses are reimbursed. A copy of a vehicle registration card must be attached to the agreement. Such decision/agreement is usually made for one calendar year. Such a decision/agreement of the board is also necessary in the case of a single-director company, once the document exists, it is already the duty of the tax authority person to verify the authenticity of the document.

Employee’s residence at a distance of 50km – If the employee’s residence is at least 50km away from the usual place of work, the employer has the opportunity to reimburse the costs of the commute. In order to deduct input VAT on the costs of such journeys, the reimbursement claim must be named of the company. In order to deduct input VAT, the tax authority will not accept an expense claim on which the name of the company is written on the claim by hand or additionally / afterwards.

In case the car is 100% is use of the company

 What are the requirements and evidence required if you decide to buy a car for the sole use of the company?

Registration in the traffic register of the Road Administration – from the traffic register of the Road Administration. Notifications can be submitted via the Road Administration’s e-service.

Logbook – As of 1 January 2018, the company does not have to keep a logbook for passenger cars.

Taxation – If the company car is used only for business trips, you do not have to pay a special benefit. If the vehicle was used only for business trips and the company can prove it, then 100% input VAT can be deducted from the cost documents issued in the name of the company. If the company’s car is used for at least one private trip, the input VAT must be deducted from the moment of purchasing the car.

It must be proven that the car is not used for non-business purposes.

The car is for the used for both, private and business purposes

Principle of calculating the special benefit – As of 1 January 2018, the price of the special benefit became cheaper for cars with lower engine power (up to 130 kW) and more expensive for cars with higher engine power (over 130 kW).

The price for a new car per KW is 1.96 EUR and for an old car the price is €1.47 per KW.

For example, in the case of a new car, the special benefit taxing goes as follows:

Income tax: 1.96 x 20/80 = €0.49

Social Security Contributions: (1.96 + 0.49) x 33% = €0.81

TOTAL €1.30 – the price of one KW special discount. (to be multiplied by car’s KWs)

Declaration – Special benefit of the employer’s car’s tax is declared on tax return Annex 4 of the TSD form latest by the 10th day of each following calendar month. The tax liability of the special benefit is reimbursed on the basis of the usual TSD.

Input VAT – the vehicle must be used for at least two years for taxable turnover. Even if just one private journey is made between business trips, the calculation immediately drops down to 50% and the input VAT must be adjusted retroactively in full, ie the declarations must be adjusted from the month of purchase of the vehicle, which also entails the interest accrued. In terms of running costs, the deduction of input VAT must be kept at 50% per one calendar year from that private journey. The actual use of the vehicle is not relevant here.

In conclusion, at the time of purchasing the car, the company has a choice between three options:

Personal car – which can be used for business purposes and receive a maximum compensation of €335 whilst keeping a logbook of journeys, paid per kilometre.

  1. The car is 100% used by the company – no personal use of the car is allowed and it with evidence of that to the tax authorities.
  2. The car is 50% for personal use and 50% for business use – Special discount is calculated on the monthly basis of basis and will depend on the age of the car and the vehicle’s KWs.

Please take into account all the above whilst making a decision about how to buy a car and use it in the future. Consideration must be given to the car’s category, kilowatts, age, how much the car would actually be used for business or personal use, lease payments, etc.

If you felt that the article was a useful read for you, but you still would require further specialist assistance in deciding, then feel free to book an appointment by email: info@sisi.ee or by phone on: +372 50 888 38.

 

Sources: www.emta.ee

www.rmp.ee