Company cars and private cars: fringe benefit and car compensation in Estonia

A small Estonian company usually pays for cars in one of two ways. It gives the owner or a staff member a company car, or it pays compensation for a private car used for work. A company car that can be used privately creates a monthly fringe benefit at a flat price per kW. A private car can get a tax-free compensation of up to 0.50 euros per km and 550 euros a month, if the company keeps a trip log.

In short

• A company car that is available for private trips creates a fringe benefit of 1.96 euros per kW a month (1.47 euros for a car older than five years). Read more
• The benefit does not depend on the kilometres driven, and paying for private trips does not reduce it. Read more
• To avoid the benefit, mark the car as work use only in the traffic register and prove that nobody uses it privately. Read more
• A sole owner who sits on the board owes the benefit like any employee. Read more
• For a private car, the company may pay up to 0.50 euros per km and 550 euros a month tax-free, with a written decision and a trip log. Read more
• The km compensation covers fuel and repairs. Paying those on top is a fringe benefit. Read more

When does private use of a company car create a fringe benefit?

A fringe benefit (erisoodustus) arises in every month in which the company lets a person use its passenger car for trips not related to work. It does not matter whether the person actually drives privately. The possibility is enough (Income Tax Act § 48 (4) clause 2 and (8)).

Who counts: an employee, a board member, and a person who works for the company under a contract for services or another law-of-obligations contract (Income Tax Act § 48 (3)). The car can be owned, leased, rented or borrowed. What matters is that the company holds it.

The monthly price of the benefit is set by law (Income Tax Act § 48 (8)):

• The kW figure is the engine power in the traffic register.
• The age is taken on the last day of the month (fringe benefit regulation § 1).
• No benefit arises in a month when the car is temporarily deregistered or its registration is suspended.

The tax. The company pays income tax at 22/78 of the benefit (Income Tax Act § 4 (1) and (1^1)). It also pays social tax at 33 percent of the benefit plus that income tax (Social Tax Act § 2 (1) clause 7, § 7 (1)). The social tax gives the driver no pension or health cover.

Example from the Tax and Customs Board (EMTA) for a new 190 kW car:

• benefit: 1.96 x 190 = 372.40 euros;
• income tax: 105.04 euros;
• social tax: (372.40 + 105.04) x 33% = 157.56 euros;
• total tax: 262.60 euros a month.

The return. Declare the benefit on TSD annex 4, code 4040, for each month. File and pay by the 10th of the next month (Income Tax Act § 54 (1) and (4); TSD form regulation).

VAT. Private use of a passenger car is not a taxable self-supply, because the 50 percent limit on input VAT already covers it (VAT Act § 2 (6), § 30 (3)). A van up to 3,500 kg is different: its private use is a self-supply when the company deducted input VAT on it (VAT Act § 12 (7^1)).

Which power figure applies to an electric or hybrid car?

The law uses the engine power recorded in the traffic register (Income Tax Act § 48 (8)). The combined system power in a sales brochure is not used.

EMTA's fringe benefit handbook sets the practice:

• Hybrid, plug-in hybrid included: the maximum power of the combustion engine in the register. The electric motor is not added.
• Electric or gas car: the motor power in the register.

Examples for a car under five years old:

So the kW method does not favour electric cars. A powerful electric car costs more in benefit tax than a small combustion car. Take the kW figure from the registration certificate when the car is registered, and keep a copy with the car's fixed asset records.

How do you keep a company car for work use only?

Three steps. Decide that the car is for work only, have the traffic register carry a "work use only" mark, and be able to prove that nobody uses the car privately. The register mark alone is not enough if the facts show private use.

1. Notify the Transport Administration (Transpordiamet) when the company starts to use a car for work only, and notify it before the car becomes available for private use (Income Tax Act § 48 (8^2); EMTA). Without the mark, EMTA assumes private use.
2. Write a car policy. Private trips are forbidden. State where the car stays outside working hours, who may drive it, and how keys are returned.
3. Keep records. Use GPS or a trip log with odometer readings at least monthly, the clients and places visited, and a reason for trips that overlap with private interests. Fuel receipts should match the mileage.

EMTA asks how private use is prevented, where the car stays at night, who drives it, and which trips were made. Signs of private use that EMTA lists: persons unrelated to the business in the registration certificate, a child seat, a roof box or bike rack, more cars than users, and a one-person company whose family has no other car (EMTA: proving business use).

The same evidence serves VAT. A car used only for business allows 100 percent input VAT deduction, but only if other use is excluded (VAT Act § 30 (4) clause 5 and (9)). If the conditions end, the 50 percent limit applies for at least one year, and a change within two years needs an adjustment (VAT Act § 30 (7) and (8)).

Commuting between home and work is a private trip, unless the conditions of Income Tax Act § 48 (5^1) are met.

Does a sole owner who is the only driver owe the benefit?

Yes, if the owner is also a board member and the car can be used privately. A board member counts as an employee for fringe benefits, with or without a board fee (Income Tax Act § 48 (3)). There is no exemption for owners, and it does not matter that nobody else drives the car.

A one-person company can still keep a work-only car, but EMTA checks it more closely. EMTA names as a sign of private use a company with one board member and no employees, where the family has no other car (EMTA). A credible case usually has a second, private car in the household, a company car parked at the office, and a GPS log whose trips match invoices and clients.

These do not work:

• saying that the owner drives only for business, with no records;
• paying a lower board fee to "offset" the car;
• paying the company for private kilometres (see the next section);
• leaving the car at the owner's home with no work reason.

If the shareholder is not on the board and does not work for the company, private use is not a fringe benefit. It is a distribution to the shareholder. See family members and shareholders.

Does paying for private trips remove the benefit?

No. For a passenger car, the benefit is the fixed kW price. It arises from the possibility of private use. Paying the company per kilometre, or even a market rent, does not reduce it (Income Tax Act § 48 (8); EMTA: trip log).

• A log of private kilometres cannot reduce the tax. A log helps only to prove that there is no private use at all.
• Money the user pays to the company is simply income of the company. For VAT, letting an employee or board member use a car for a fee is not a supply (VAT Act § 4 (2) clause 8).
• Fuel the user buys personally for private trips does not reduce the benefit either.

Other vehicles are valued at market rent. A van or lorry with a total mass up to 3 500 kg may use the same kW price instead (Income Tax Act § 48 (8^1)). At market rent, a payment by the user does reduce the benefit, to the difference between the market rent and the price paid (fringe benefit regulation § 2 (1)).

Do fuel, insurance and parking create a separate benefit?

For the company's own car, no. The kW price is the value of making the car available. Fuel or charging, insurance, maintenance, tyres, washing, parking during use and the motor vehicle tax are the company's own costs. EMTA confirms it for the motor vehicle tax: paying it creates no extra benefit, and the benefit does not depend on the actual costs of the car (EMTA, motor vehicle tax answer 5; Motor Vehicle Tax Act § 5).

A separate benefit arises when the company pays for something outside its car:

• A fuel card used for another car, for example the user's or the family's private car. That covers the user's costs, a benefit at the amount paid (Income Tax Act § 48 (4); fringe benefit regulation § 6 (1)).
• Home costs, such as the user's home electricity bill or a residential parking permit, unless metered charging of the car is shown. Keep a separate meter or charging card data.
• Fines imposed by law and paid by the company are non-business expenses taxed at 22/78 (Income Tax Act § 34 clause 3, § 51 (2) clause 1).

VAT on running costs follows the car: 50 percent of input VAT when the car is also used privately, 100 percent only for exclusive business use (VAT Act § 30 (3) and (4)).

How does the tax-free compensation for a private car work?

The company may pay up to 0.50 euros per km, and at most 550 euros a month per employer, tax-free for work trips in a private car. It needs a written decision and a trip log (Income Tax Act § 13 (3) clause 2). The limits rose on 01.01.2025 (amending act, RT I, 20.12.2024, 2). Older templates still show the earlier limits of 0.30 euros per km and 335 euros a month (Income Tax Act § 13 (3) clause 2, version of 2023).

Who can receive it. An employee, an official, or a member of the management board or supervisory board. A shareholder who is not on the board, and a contractor under a contract for services, cannot receive this compensation. The company can still reimburse their documented costs incurred for the company (Income Tax Act § 12 (3); EMTA).

Which car. A passenger car (categories M1 and M1G) in the person's use that the company neither owns nor possesses. It may belong to a spouse or be leased by the person, but the right to use it must be documented (Income Tax Act § 13 (3) clause 2; car compensation regulation).

The documents (car compensation regulation §§ 3 and 4; EMTA: documents):

1. A written decision of the employer. It names the person, the amount, and the date or period of the trips. It may cover more than one month. Attach a copy of the document that proves the right to use the car, such as the registration certificate, unless it has not changed since last time.
2. A trip log (sõidupäevik). For each work trip it shows:
   • the driver's name;
   • the car's registration number;
   • the odometer reading at the start and at the end of the trip;
   • the date and the purpose of the trip.

Paper, a spreadsheet or a GPS app are all fine. Pay only for trips already made.

Over the limits.

• A lower rate, such as 0.30 euros per km, is allowed.
• A rate above 0.50 euros per km makes the excess a fringe benefit, even under 550 euros a month. The same applies to the part above 550 euros. Declare it on TSD annex 4, code 4030, in the month of payment (Income Tax Act § 48 (4) clause 5).
• Without a trip log, the whole payment is salary, declared for the person on TSD annex 1 (EMTA handbook: fringe benefits).
• Report all compensation paid in the year on the INF 14 form by 1 February of the next year (Income Tax Act § 56^1; EMTA: declaring).

Parking fees paid on work trips can be reimbursed on top of the km rate (Income Tax Act § 13 (3) clause 2^3). Commuting is not a work trip, unless the conditions of Income Tax Act § 48 (5^1) are met.

Can the company also pay fuel and repairs of a private car?

No. The km compensation covers every normal cost of the car: fuel, insurance, tyres, repairs and wear. Paying fuel receipts or repair bills of a private car, on top of the compensation or instead of it, is a fringe benefit at the amount paid (Income Tax Act § 12 (3), § 48 (4); fringe benefit regulation § 6 (1); EMTA: limits).

What is allowed:

• Parking fees on work trips, against receipts (Income Tax Act § 13 (3) clause 2^3).
• A business trip in a private car. The company pays either the km rate, or the costs directly related to the trip and incurred in addition for it, against documents. The second method never covers repairs or maintenance (business trip regulation § 2 (4)). Choose one method per trip.
• Fuel receipts for commuting, only for an employee under an employment contract whose home is at least 50 km from the workplace (Income Tax Act § 48 (5^1)). A board member or contractor does not have this choice.

What is not allowed: a monthly fuel card for the owner's private car, paying its annual service or winter tyres, or paying its insurance or motor vehicle tax. Each one goes on TSD annex 4 at the amount paid, with 22/78 income tax and 33 percent social tax. Input VAT on these costs is not deductible.

If the company should really bear these costs, make the car a company car and accept the kW benefit, or keep it for work use only.

Company car or private car: which is cheaper?

It depends on the business mileage, the car's power and its price. Use the comparison below for the tax side only. Financing, insurance, the motor vehicle tax and resale value also count.

Company car, private use allowed. The company buys or leases the car and pays all its costs. Only the monthly benefit is taxed. For a new 110 kW car that is 152.03 euros of tax a month, or about 1,824 euros a year (Income Tax Act § 48 (8)). For the same car older than five years it is 114.02 euros a month. A VAT-registered company deducts 50 percent of the input VAT on the car and its costs (VAT Act § 30 (3)).

Private car with compensation. The owner buys the car personally, usually with money taken out of the company as a dividend or salary, which is taxed first. For example, to pay 25,000 euros net as a dividend, the company pays 7,051 euros of income tax at 22/78 (Income Tax Act § 50 (1), § 4 (1^1)). The company then pays up to 0.50 euros per business km and 550 euros a month tax-free, up to 6,600 euros a year, for logged work trips only.

Rules of thumb:

• Little business driving, a few hundred km a month: the compensation is small. A modest company car with the kW benefit is often cheaper overall.
• High business mileage, about 1,100 km a month or more: the private car earns the full 550 euros tax-free each month.
• A powerful car, such as an electric car above 200 kW: the kW benefit is high, which favours the private car.
• The car will later go to the owner: a sale below the market price is a fringe benefit. Its value is the market price, or the book value of the car if that is higher or no reliable market price exists, minus the price paid (Income Tax Act § 48 (4) clause 7; fringe benefit regulation § 2 (4)). Document the market price.

Do not combine the two routes. A car that the company owns or leases is never a private car, so the company cannot pay km compensation for it.

Can family members drive the company car?

Yes, but that is private use. A benefit given to the spouse, partner or relative of an employee or board member is the employer's fringe benefit, taxed with the same kW method (Income Tax Act § 48 (6)). The law prices the car, not each driver. A family member who drives the car is also strong evidence against a work-only claim.

It becomes a distribution to a shareholder when the person who benefits is a shareholder with no board seat, job or service contract at the company, or that shareholder's family. Examples: a car used only by a passive co-owner, or a car bought for the spouse of a shareholder who neither sits on the board nor works for the company. Then:

• the value is the market rent, not the kW price;
• the company pays 22/78 income tax on it, declared on TSD annex 7 as a distribution in kind, or on annex 6 as a transfer price difference with a related person, by the 10th of the next month (Income Tax Act §§ 8, 50 (1) and (4), 54; TSD form regulation);
• a car bought for no business purpose is a non-business payment taxed at 22/78, and its running costs are non-business expenses (Income Tax Act § 51 (2), § 52 (2) clause 1).

Company law adds a second problem. A distribution needs an approved annual report, the net asset test and a shareholders' resolution (Commercial Code § 157 (1) and (3), § 168 (1) clause 5). An unlawful payment must be returned, and the board members who caused it are jointly liable with the shareholder (Commercial Code § 158). For how distributions work, see founder remuneration.

To stay safe: treat family use as private use by the director and pay the kW benefit, and do not let a shareholder without a board seat use a company car free of charge.

For the motor vehicle tax, the registration fee and insurance of company cars, see vehicle tax, fleet and insurance and the car tax calculator. For other benefits, per diems and travel, see fringe benefits and travel.

General information, not advice for your situation. The law as in force on 30.09.2026.