A company car parked at a founder's home can create a payroll tax question even when the month contains only one personal trip. Estonia does not value this benefit from fuel receipts or a private-kilometre total. For an employer passenger car, the tax base is tied to the engine power recorded in the motor register and, after the car is more than five years old, to a lower rate.
In more than 15 years of Estonian accounting, I have seen businesses confuse three different issues: reimbursing an employee's personal car, allowing private use of the employer's car, and proving that a passenger car is used only for business. This guide isolates the second case, works through a 110 kW example, and shows what must reach payroll and VAT records before month-end.
Private availability, not the kilometre count, triggers the rule
Under Estonian Income Tax Act, section 48(8), enabling non-business use of a passenger car owned or possessed by the employer creates a fixed monthly benefit. It applies to cars the company owns, leases or otherwise holds. The practical test is whether private use was made available, not whether the employee submitted a large fuel claim.
EMTA guidance on private use of employer passenger cars confirms that employee reimbursement of running costs does not turn a mixed-use car into a business-only car. A logbook also cannot be used to price and repay employer-car private kilometres out of the benefit. It is useful as evidence only when the company is genuinely defending business-only use.
| Car arrangement | Tax starting point | What decides the treatment |
|---|---|---|
| Employer car available for private trips | Monthly fringe benefit | Registered kW and vehicle age |
| Employer car used only for business | No car benefit | Private use is prohibited and prevented |
| Employee's own car used for work | Separate reimbursement regime | Written decision, business trips and limits |
| Car temporarily removed from the register | No benefit for that tax period | Valid register status for the month |
Worked example: a 110 kW passenger car
Assume the company lets an employee use a 110 kW passenger car privately during September. For a car not more than five years old, the benefit value is EUR 215.60: 110 × EUR 1.96. Income tax is EUR 60.81 using 22/78. Social tax is EUR 91.22: 33% of EUR 276.41. The employer's monthly tax payment for the car benefit is therefore EUR 152.03.
For the same car after it is more than five years old, EMTA calculation and TSD guidance for fringe benefits uses EUR 1.47 per kW. The benefit becomes EUR 161.70, income tax EUR 45.61 and social tax EUR 68.41, producing EUR 114.02 of employer taxes. Actual private distance does not reduce either calculation.
| Monthly calculation for 110 kW | Up to 5 years | More than 5 years |
|---|---|---|
| Fringe-benefit value | EUR 215.60 | EUR 161.70 |
| Income tax at 22/78 | EUR 60.81 | EUR 45.61 |
| Social tax at 33% | EUR 91.22 | EUR 68.41 |
| Employer taxes | EUR 152.03 | EUR 114.02 |
The annual motor vehicle tax is a separate company expense. EMTA states that paying it does not create an extra employee benefit and does not change the kW-based calculation.
Put the decision into TSD before the next month's deadline
Declare private availability in TSD Annex 4 under code 4040 by the 10th day of the following month. Payroll needs the registration number, registered engine power, first-registration date, the month of private availability and confirmation that the car was not temporarily removed from the register. The tax is paid by the employer, not withheld from the employee's net salary.
Do not wait for the accountant to infer the car's use from fuel invoices. Management should state the operating regime when the car is assigned and confirm any change before payroll closes. If private access started or stopped during the month, document the exact facts and review the whole tax period rather than silently prorating the fixed monthly value by kilometres.
- Record whether private use is allowed or effectively possible.
- Verify registered kW, vehicle age and register status.
- Send the confirmed monthly value to payroll before TSD is prepared.
- Reconcile code 4040 and the tax payment by the next month's 10th.
Keep the VAT decision separate from the payroll tax
The general passenger-car rule in Estonian VAT Act, section 30 limits input VAT on the car, lease and related goods and services to 50% when the car is used in business but is not within a statutory exception. That is why paying the kW-based fringe-benefit tax does not by itself create a 100% VAT deduction.
A 100% input-VAT position requires genuine business-only use and evidence. EMTA guidance on passenger-car VAT records lets the business choose its control method, such as a detailed logbook or GPS, but the controls must show that private trips are excluded in practice. If use changes, review the input-VAT position in that period instead of leaving the old setting in bookkeeping.
- Match the VAT setting to the car's actual use, not to a label in the fixed-asset register.
- Keep purchase or lease invoices and related expense invoices linked to the same vehicle.
- Document who may use the car, where it is parked and how access is controlled.
- Escalate taxis, driving-school cars and qualifying N1 vehicles for a separate exception review.
Business-only use must be credible outside the spreadsheet
EMTA guidance on proving business-only car use asks how private use is prevented, where the car is kept outside working hours, who can use it and how mileage relates to the business. A written ban is not persuasive if the only director takes the car home, the family has no other vehicle and nobody reviews the trips.
Choose one regime that matches reality. If private use is allowed, budget the kW-based tax and report it consistently. If the car is business-only, combine a board decision, user rules, key control, parking arrangements and trip evidence. The expensive outcome is claiming business-only use while everyday facts point in the opposite direction.
I ask one operational question before looking at the logbook: who has the keys after working hours? The answer often identifies the correct tax regime faster than a month of perfectly formatted mileage rows.
Company-car tax becomes predictable when management chooses the real use regime first. Private availability leads to a monthly kW-based value, TSD code 4040 and employer-paid taxes. A business-only position needs controls and evidence, while VAT remains a separate calculation.
Before assigning a passenger car or changing its use, send the registration data and planned access rules to your accountant. Contact AccRes to align payroll, VAT and supporting records before month-end.