Finance Ministry proposes taxing company cars based on engine power (3)

Riding in style would get at least a little bit more expensive: Traffic jam in Tallinn (Postimees/Scanpix)
4/18/2016 9:30 AM
Category: Business

The Finance Ministry has been working on a proposal to change the taxation of company-owned vehicles. Wherever company-owned cars are used for work as well as private purposes by the company’s employees or officials, the new proposal suggests to make the amount of tax to be paid dependent on the vehicle’s age and power.

This represents a departure from the otherwise rather evenly applied principle of flat rate taxes. The step is also supposed to make people’s lives easier, as the proposal wants to get rid of the obligatory logbook.

Currently, mixed-use vehicles are taxed evenly - for every special privilege granted to an employee and a car given to them both for work and private use, a company pays a flat rate tax.

The new proposal would tax the power of the car's engine, raising €1.30 per kilowatt. If e.g. a popular model like the Škoda Octavia at 81 kW is currently taxed with a flat fee of €169.90, under the new regime that car would cost its company just €105.30 tax a month.

According to the Road Administration, the current average power of a company-owned car is 114 kW. One could think that Estonian companies buy rather powerful cars for their sales representatives - but the average is high for a different reason.

In the past, the practice of buying and running a large and expensive car through a private limited company and getting reimbursed for the 20% VAT paid on the price has been very common.

For instance, the price of the entry-level model of the popular Volvo XC90 SUV includes €8,233 VAT. If a private limited company pays for this car, whoever eventually drives it will profit from the fact that the business is going to be reimbursed for the VAT expense by the state. This, effectively, makes the car quite a bit cheaper.

Of course, there’s additional paperwork involved, as well as a the flat rate tax to be paid on it. But as it’s a flat rate tax, this means that the more expensive the company car gets, the better this scheme works. For a lower-end Škoda model, the flat rate tax is high; for an upper-end Audi or Mercedes, it is laughable.

This is why taxing kilowatts can make sense. While the sales rep’s Škoda mentioned above at 81 kW would get the state €105.30 tax a month, the entry-level XC90 at 140 kW would get the state €182. In other words, cheaper cars would be cheaper to maintain, luxury cars more expensive.

Beyond mixed-use cars, the approach to taxation would remain more or less the same, with cars intended for commercial use only specially registered and their purpose declared explicitly.

For the N1 vehicle category, namely vans, the new system would be voluntary, the Finance Ministry said. Also, the proposal suggests a 25% tax reduction for all vehicles older than five years.

There are roughly 75,000 company cars in Estonia. In the case of most of them, there is a direct correlation between power and price - the more powerful the engine, the more expensive the car.

The new proposal would make the taxation simpler and fairer at the same time. Finance Minister Sven Sester (IRL) said that the point of the proposal was to simplify the taxation of company cars in mixed use and to make it more systematic. He will present the idea to the government in the coming months.

Editor: Dario Cavegn

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