While there is no car tax in Estonia at present, it exists in both of our northern and southern neighbors, making the purchase of certain types of vehicles in Finland nearly twice as expensive as in Latvia. ERR compares the car tax systems of both countries in order to provide a more complete picture of how vehicle ownership and use can be taxed.
According to "The good tax guide," a car taxation survey of 31 European countries commissioned by the European Federation for Transport and Environment (T&E) and published in October of last year, Finland's car taxation system is rated as one of the best in the region, with no unfavorable feedback from the organization, whereas Latvia receives criticism on at least three aspects of taxation.
The approach of Latvia to vehicle taxation stands in stark contrast to that of the many European countries. According to the report, Latvia is one of only nine countries without a car purchase tax, has the lowest taxation on company vehicles for private use in Europe, and is the only country to tax this benefit based on engine size.
Taxes when buying a car
According to the OECD's 2022 Consumption Tax Review, ("Taxing vehicles and their use") the price of a car in Latvia is subject to a 21 percent value-added tax, €43.93 for registration, a number plate, and a technical passport, as well as a €55 natural resource levy. In Latvia, there is no direct one-time tax on the purchase of a vehicle.
In Finland, however, the car purchase tax is dependent on the amount of CO2 emitted by the vehicle and is charged as a percentage of the car's price, so the tax on more polluting and expensive vehicles is higher. The resulting tax burden in Finland is higher than the European average for several fuel types and vehicle classes, the report by the T&E shows.
According to OECD data, the car purchase fee in Finland is made up of 24 percent VAT and a CO2 component, with the registration fee being zero if CO2 emissions are 0 grams per kilometer and rising to 48.9 percent of the car's cost if emissions are 360 grams per kilometer or more.
Countries determine the annual car tax based on a variety of factors, such as the price of the car, the type of fuel, the amount of CO2 emissions, the weight of the vehicle, its length, engine capacity and power, its age, the number of axles on vehicles, etc.
According to the OECD, this is determined by the CO2 emissions of the vehicle, the weight of the car and the number of axles on trucks in Finland. Thus, the annual tax for a zero-emission vehicle is €53.29, while the highest annual tax for a vehicle emitting 400 grams or more of CO2 per kilometer is €654.44, with a gradual increase. In addition, owners of non-petrol cars in Finland pay a tax on driving capacity based on the vehicle's weight.
According to the T&E report, Finland's car tariffs are below the European average for gasoline and plug-in hybrid vehicles, but above average for purely electric vehicles.
In Latvia, the annual car tax is dependent on a vehicle's CO2 emissions, with the tax increasing in increments as emissions rise. The annual car tax is approximately €10 up to an emission level of 95 grams of CO2 per kilometer, increasing in €20 increments until it reaches €200 per year at an emission level of 225 grams.
This tax will be levied on new automobiles registered after December 31, 2008. CO2 emissions will be calculated using the Worldwide Harmonized Light Vehicle Test Procedure (WLTP) beginning in 2021. The annual tax on vehicles registered between 2005 and 2008 will be based on weight, engine displacement, and horsepower. The annual charge for historic automobiles is determined by the gross vehicle weight of the vehicle. In Latvia, motorcycle owners are taxed based on engine displacement, whilst vehicle owners are taxed based on gross weight and axle count.
According to a research by the European Transport and Environment Federation, Latvia has one of the lowest total vehicle tax rates in Europe since the calculation of the annual car tax starts from an emission threshold of 50 grams of CO2 per km and excludes electric and plug-in hybrid automobiles.
Incentives and other costs
As the cost of owning a car is also affected by fuel excise duty, the availability of tax exemptions, depreciation calculation and the taxation of the vehicle depending on whether the company car can be used for private journeys, the reviews also set out these parameters.
Excise duties on fuel are higher in Finland than in Latvia: 72 and 52 cents per liter of petrol and 52 and 42 cents per liter of diesel respectively. While Finland's fuel excise duties are among the three highest in Europe, according to a review by the European Transport and Environment Federation, Latvia's are slightly above average.
Depreciation is allowed for a car on a company's books in Finland to cover the value of the car in four years, in Latvia the same period is five years, but this does not apply to cars costing more than €50,000 as they are classified as luxury cars in Latvia.
VAT can be reclaimed in full on company cars in Finland if they are purely company cars, but if the car is also used partly for private purposes, VAT is not refundable. According to a report by the European Transport and Environment Federation, this is in sharp contrast to many other countries where mixed-use vehicles can still get part of their VAT back.
In Latvia, a company cannot recover VAT on cars with a price higher than €50,000. Half of the VAT paid on the purchase of these cheaper cars, as well as the VAT paid on their repair costs, can be reclaimed. This applies regardless of whether the vehicle is used exclusively for business purposes or also for private purposes.
Taxation of a company car as a bonus
In Finland, the taxation of company cars for private use is based on a complex formula that takes into account the replacement cost of the vehicle, a fixed fee and discounts for electric and hybrid cars. There are different levels of taxation depending on whether or not there are restrictions on the use of the car, and overall the tax in Finland is higher than the European average. However, the tax can also be charged on the basis of the number of kilometers traveled by such a car: seven cents per kilometer for a car with limited use and 18 cents for a work car with unlimited use.
In Latvia, cars costing more than €50,000 cannot be declared as a company car for personal use. A company can pay company car tax on a cheaper car if it does not wish to pay for it under the personal car tax scheme. This would mean that both personal income tax (at a rate of 20-31 percent) and social tax (34.09 percent) would be payable on the use and depreciation of such a car.
As Latvia is the only country in Europe that taxes cars for private use on the basis of engine capacity, while most countries calculate it on the basis of CO2 emissions or the price of the vehicle, and this tax rate is very low, most companies opt for it, which is why Latvia has the lowest level of taxation on cars for private use in Europe, the review states.
In addition, the cost of buying and owning a car is also influenced by whether the state subsidizes the purchase of electric or hybrid vehicles.
Comparison of the cost of buying a new car in Finland and Latvia
The OECD's review also shows how much it costs to buy and register a new car in the organization's member countries. Four types of car are considered:
Category A: SUV/hatchback with electric motor, power 150 kilowatts (204 horsepower), battery capacity 58 kilowatt-hours, energy consumption 17 kilowatt-hours per 100 kilometers, weight 1,730 kilogram, zero grams of CO2 per kilometer, battery range over 400 kilometers, price $33,000 (e.g. Volkswagen ID3).
Category B: electric sedan, power 370 kW (496 hp), battery capacity 82 kWh, energy consumption 15 kWh/100km, weight 1830 kg, CO2 emissions 0g/km, battery range over 400 km, price $55,000 (e.g. Tesla model 3).
Category C: hybrid sedan, 1.8-litre internal combustion engine, 121 kW (162 hp) electric motor, 4.5 l/100 petrol consumption (combined) and 53 kW (71 hp) electric motor, 1.3 kWh battery capacity, 1,800 kg weight, 115 g CO2/km, 3 mg NOx/km (the nitrogen oxides that are most relevant for air pollution); price $23,000 (e.g. Toyota Corolla Hybrid LE).
Category D: four-wheel-drive (4WD) petrol-engined cargo van, V6 engine capacity 3.5 liters, power 300 kW (400 hp), fuel consumption 12.4 l/100, CO2 emissions 296g/km, NOx emissions 20 mg/km, weight 2,200 kg; price $50,000 (example Ford F - 150 EcoBoost V6).
The figures in the table do not add up to the final price, but the OECD review does not explain the reason for the difference.
Editor: Mait Ots, Kristina Kersa