Since Jan. 1, company cars used by employees in the place of a private car are taxed based on engine power. The more kilowatts, the more expensive the tax. This has led to thousands of applications to change ownership of cars already in December, and now to waiting lines of several weeks to months.
Imagine being able to buy a car and then get at least part of the value-added tax on it back from the state. And then to run the car through your public limited company, paying zero income tax on gas money, repairs, technical checks, and so on.
Before Jan. 1 this year, a special benefits tax did exist for companies that let their employees use company-owned cars. But this tax didn't need to be paid as long as there was a logbook documenting how the car was used.
To many, it was cheaper to do things this way, especially to those with a penchant for powerful executive or luxury cars. As it was all private business, what type of car you would buy only depended on the business sector you were in, and that is something any company owner can decide for themselves.
Where Audis and Porsches become vans
Estonians call these cars salakaubikud, "mystery vans". Minister of Justice Urmas Reinsalu suggested introducing colored license plates for company cars shortly after a new coalition agreement was signed in late 2016, perhaps in an attempt to shame a certain group of drivers of expensive cars into owning them privately and paying income tax on the money they spend on them.
Reinsalu's colored license plates didn't make it. Instead, the coalition of Center Party, the Social Democrats, and the Pro Patria and Res Publica Union (IRL) introduced an engine power-based tax on company cars, to be paid where previously a logbook did the trick.
With no way around paying extra anymore, thousands of people who previously used their company cars privately began buying them out of their companies and switching leasing contracts. In December 2016 alone some 4,000 applications were submitted.
The change has had an effect on car sales as well: according to dealerships, companies now consider engine power when they buy cars, quite different from before.
The sudden popularity of the issue is making life difficult for major leasing providers such as Luminor. Luminor is the aggregate of what used to be the Baltic branches of DNB and Nordea. Their leasing division is currently warning clients looking to change their contracts that they may have to wait up to three months.
At Swedbank the waiting lines aren't quite as long, but what usually takes two to three days currently takes around a week.
Luminor's press spokeswoman, Hedwig Meidra, confirmed to daily Eesti Päevaleht that the tax change has had a great impact on their working speed, and that the large amount of applications has surprised them.
Tax board: Cars still have to change ownership at market prices
Meanwhile the Tax and Customs Board points out that anyone changing ownership of a car from a company to a private individual needs to meet a number of requirements. For example, vehicles need to change hands at current market prices, VAT needs to be paid, and the company selling the car actually needs to receive the money the new private owner pays for it.
Companies are at risk where the selling price of a car is too low, and where they don't receive the money the new private owner pays for their vehicle.
Typically these risks come up where a company car is sold to a member of the company's management board, a member of their family, or a company employee.
In such a situation, both VAT and the special benefits tax have to be paid, as well as interest at an annual rate of 22 percent.
The tax board has already cautioned people and companies not to try and come up with schemes to first buy a car through a company, get the VAT paid on the vehicle back from the state, and then sell the vehicle to a private individual connected to the company, as the eventual cost of such an attempt to evade the special benefits tax could turn out to be very high.
Editor: Dario Cavegn