Estonia: Planned changes to the Estonian Income Tax Act and Value Added Tax Act

The Estonian Ministry of Finance has initiated draft Income Tax Act and Value-Added Tax Act that will considerably change taxation of the purchase and use of an employer’s automobile. Those changes will affect every private company, whose employee or member of the board uses the company or personal automobile for personal needs.  

According to applicable law, the employer has rights to pay to employee compensation for using of the private automobile and to qualify for tax-free compensation in two ways. Income tax is not charged on compensation for employment related use of the personal automobile, paid to an employee, or member of the management or controlling body of a legal person if 1) driving records are kept, the tax exempt limit of compensation paid to one person is 0.30 Euros per kilometer, but not more than 256 Euros during each calendar month per each employer paying the compensation, and 2) if no records are kept, the tax exempt limit of compensation paid to a person is 64 Euros in total during each calendar month for all employers paying the compensation. 

Draft law amends the Income Tax Act, establishing that the compensation would not depend on whether the employee drove the automobile for personal needs for 1 or 1000 kilometers. Compensation to an employee or member of the management or controlling body may be paid if a person is keeping driving records. Also, the draft law aims to abolish the possibility of giving 64 Euros tax-free compensation to employees as compensation for using their personal automobiles without keeping driving records.

If these amendments shall come into force, it will be mandatory to keep records regarding use of the personal automobiles to qualify for tax-free compensation.

Valters Gencs

Tax Attorney & Founding Partner

Gencs Valters Law Firm, Riga

Email: valters.gencs@gencs.eu Tel: +371 67 24 00 90