Fringe benefits

By its nature, fringe benefit is the income of the recipient (employee), but paying income and social tax on the fringe benefit is the obligation of the person granting the benefit (employer). Fringe benefits i.e. benefits provided by the employer to the employee are subject to income tax at a rate of 20/80 and social tax at a rate of 33%.

Employers shall pay the full amount of income and social tax calculated on granted fringe benefits. The taxable income of a natural person does not include fringe benefits.

A person who grants taxable fringe benefits is required to submit a tax return on form TSD with annex 4 to the Estonian Tax and Customs Board by the 10th day of the calendar month following the period of taxation.

It is preferred that tax returns will be submitted by electronic means – the Estonian Tax and Customs Board´s electronic service desk e-MTA.

The rate of income tax on fringe benefits granted to a natural person is 20/80 of the taxable amount.

The social tax shall be paid at a rate of 33% on fringe benefits and also on income tax calculated on fringe benefits.

For example
Price of fringe benefit (for example housing expenses) 1000 euros
Income tax 250 euros = 1000 x 20/80
Social tax 412,50 euros = (1000 + 250) x 33%
A total cost to employer is 1 662,50 euros = 1000 + 250 + 412,50

Who is an employer?

For the purposes of taxation of fringe benefits, an employer is:

  • a resident legal person
  • a resident natural person
  • a state or local government authority
  • a non-resident who has a permanent establishment in Estonia
  • a non-resident whose employees work in Estonia

Who is an employee?

For the purposes of taxation of fringe benefits, an employee is:

  • a person employed under an employment contract
  • a public servant
  • a member of the management or controlling body
  • a natural person who sells goods to an employer during a period longer than six months
  • a natural person who works or provides services on the basis of a contract for services, authorisation agreement or any other contract under the Law of Obligations Act
  • the spouse, parent or child of a person specified above
  • fringe benefits made by a person belonging to the same group with an employer are regarded to be benefits granted by the employer

However, the term of an employee depends on the type of the fringe benefit.

Please note

The fringe benefits granted to the abovementioned persons shall be taxable irrespective of the period of granting the benefits. Thus, when a person has left the job, a gift from a former employer shall be regarded to be fringe benefit for taxation purposes.

In general, the price of a fringe benefit shall be determined on the basis of the market price of the goods or services provided as a fringe benefit.

When a fringe benefit is a transfer free of charge or a sale or an exchange at a price lower than the market price, of a thing, security, proprietary right or service (except a motor-car), the price of the fringe benefit shall be regarded the market price or the difference between the market price and preference price of the rent.

Fringe benefits for taxation purposes do not include cash payments ordinarily regarded as salary, wages, additional remuneration, additional payments, remuneration of a member of a management or controlling body, or payments for goods or services and on which income tax shall be withheld upon making the payment.

Taxable fringe benefits include for example (the list is not final):

  • full or partial covering of housing expenses
  • payment of insurance premiums, unless such obligation is prescribed by law
  • compensation for use of a private automobile in so far as it exceeds the limits established by the Income Tax Act.
    The maximum price of a fringe benefit for the use of an automobile of the employee free of charge or at a preferential price for activities not related to employment or service duties or to the employer's business, if records are maintained, is 0.30 euros per km, but maximum 335 euros per month for each employer.
  • since 2018, the enabling of a use of a vehicle of the employer for activities not related to business. Taxes on fringe benefit are calculated according to engine power (kilowatt price). The special fare for a new passenger car is 1.96 euros per kW per month and passenger car over 5 years of age is 1.47 euros per kW per month.
  • loans given with lower interest than the minimum rate. The price of the fringe benefit shall be calculated as a difference between the interest of the minimum rate and the amount specified as interest according to the loan agreement.
  • transfer free of charge or sale or exchange at a price lower than the market price, of a thing, security, proprietary right or service
  • purchase of a thing, security, proprietary right or service at a price higher than the market price
  • waiver of a monetary claim, unless the estimated reasonable costs of collecting the monetary claim exceed the claimed amount
  • coverage of expenses relating to formal or informal education acquired in the adult education system except for the expenses relating to the employer´s business
  • birthday presents (in spite of the cost)
  • catering provided for the employees free of charge or at a preferential price
  • coverage of expenses for the employees’ clothing unless such obligation is prescribed by law
  • coverage of expenses incurred to transport employees between their residence and their place of employment unless it is impossible to make the journey using public transport with a reasonable expenditure of time and money, or if handicapped employees are unable to use public transport or if use of public transport would cause an essential decrease of the persons' ability to move or work
  • employee´s study loan or interest on it covered by the employer
  • penalties and fines paid for employees by the employer (parking fine)
  • etc.

The following tax exemptions are applicable in relation to persons employed under an employment contract, public servants and members of the management or controlling bodies:

  • coverage of expenses incurred to transport employees between their residence and their place of employment are not classified as fringe benefits if it is impossible to make the journey using public transport with a reasonable expenditure of time and money, or if handicapped employees are unable to use public transport or if use of public transport would cause an essential decrease of the persons' ability to move or work;
  • compensation for the use of a private car upon business trips at the amount maximum 0.30  euros per km, but not exceeding 335 euros per month, if there is a written calculation about the journey, a decision or regulation by the employer, where personal data of the recipient, the amount of compensation and the purpose and date of the journey shall be indicated.
  • The expenses relating to the formal education in connection with an employment or service relationship or with membership of the management or controlling body of a legal person or a permanent establishment of a non-resident legal person.

Amounts of compensations exceeding the limits shall be regarded fringe benefits.

This guideline is to be considered as unofficial and informative and should not be treated as final. In specific cases one must act according to law. In case of questions, you are welcome to contact the Estonian Tax and Customs Board.

Tax incentive for health and sports expenses

Expenses made for improving the employee’s health will not be taxed as a fringe benefit in the extent of 100 euros per employee per quarter if the employer has made this option available to all employees.

An employee means:

  • a person working under an employment contract
  • an official
  • a member of a management or controlling body
  • a sole proprietor who sells goods to an employer for longer than six months
  • any natural person working or providing services under a contract for services, an authorization contract or other contract under the law of obligations

The tax incentive does not apply to any health and sports expenses of the employee’s spouse, partner or direct or close relative, or any health and sports expenses of an employee of the same group as the employer or of another company.

Tax exempt health promotion expenses include:

  1. participation fee in public sports events
  2. expenses directly related to regular use of sporting or mobility venues
  3. expenses made for maintenance of the employer’s existing sports facilities
  4. expenses made for the services of a rehabilitation therapist, physiotherapist, occupational therapist, clinical speech therapist or clinical psychologist entered in the state register of health care professionals or holding a corresponding professional certificate
  5. health insurance premiums of a sickness insurance contract

An employer can compensate up to 100 euros per employee per quarter for health and sports expenses exempt from tax.

It should be borne in mind that:

  • the amount of 100 euros includes VAT and input value added tax cannot be deducted on health and sports expenses incurred by the employee
  • 100 euros may be used within one day, one month or three months. The important thing is that the total sum of the tax exempt expenses for one quarter is up to 100 euros.
  • 100 euros are per each employee per quarter and cannot be transferred to other employees or to subsequent months or quarters, or to sum up of tax exempt costs for the whole year is not allowed
  • if an employee has several employerseach employer may apply a tax incentive in the amount of 100 euros for health and sports expenses
  • an expense document is required to compensate the cost (exempt from taxes)
  • it is necessary to keep person-based accounting (it is possible to select between cash-based or accrual accounting)
  • there is no obligation to compensate the sports and health expenses, it is an opportunity to an employer
  • the employee receives the benefit due to their employment relationship (contract will be signed in the future, is suspended, valid or terminated)
  • the tax incentive does not cover equipment (clothing, footwear, a table tennis racket, skis, including rental of sports equipment and facilities, and so on) or extra services (for example, catering, transport, parking, luggage storage, banquet after the event and so on) necessary for the activity
  • the tax incentive also extends to health and sports expenses incurred outside of Estonia

The employer can decide whether and what health promotion services or sporting options to offer to its employees. It is up to the employee to decide whether and which health promotion services or sporting options he or she uses.

Examples

An employer has 10 employees, but only two of them have wished to take advantage of the health promotion. Thus, the employer can cover health promotion expenses exempt from tax for two employees or 200 euros per quarter.

An employer has concluded a contract for the use of a sports club in the amount of 500 euros per month (that is 1500 euros per quarter). The employer has 20 employees. If 10 of them have wished to take advantage of the sporting option, the tax exempt cost of using the sports club would be 1000 euros (10 × 100) and the employer would have to tax the 500 euros (1500 – 500) for the use of the sports club as a fringe benefit with income and social tax. If all 20 employees have wished to take advantage of the sporting option, the tax exempt cost of using the sports club is 2000 euros (20 × 100), and since the employer pays 1500 euros per quarter, no tax liability shall arise.

The employer may set different ceilings for the reimbursement for employees if the reimbursement is guaranteed to all employees. However, the introduction of a ceiling cannot lead to a situation where some employees have no opportunity, in principle, to compensate the expenses, for example: the ceiling is 100 euros per quarter for members of the board and 10 euros per quarter for employees. In such a case, the benefits have not been offered to all employees similarly.

The tax incentive is not intended for employees working under a short-term (for example, one-day) authorization contract (such as freelance journalists, educational staff, members of thesis defence committees, reviewers, experts, registered unemployed persons who undertake workbits, and so on). While the Income Tax Act allows tax exempt health promotion expenses on these people, not offering them the benefit is not considered a violation of the condition, requiring a discount for all employees.

Participation fees related to public sporting events which can be attended by anyone (subject to understandable restrictions set by the organizer, for example, number of participants, obligation to pay a participation fee, and so on) are not taxed as fringe benefits, regardless of the employer. Public sporting events are various public events and individual events.

Public sporting events are not, for example, in-house sports days or similar events aimed at a more targeted audience, which usually requires working for the employer or other legal obligation. Public sports events also include events meant to be held to support sports activities (exercises, competitions) between employees of the enterprise. For example, sports competitions organised for employees of separate enterprises in the area of information and communication technology, tournaments between companies (for example basketball, volleyball). Characteristic features determing public sports event are: public notification, event agenda, rules, comparison of results (scores) of participants (companies and/or natural persons), praising the best.

Examples

Public sporting events include Narva Energy Run, Night Run Estonia, Tallinn Marathon, SEB May Run, Lake Viljandi Run, Tartu City Run, LHV Health Run and Walk, Saaremaa Three Days Running, Tammsaare Folk Hike, Ekström’s March in Lahemaa and others.

An employer purchases its employees an adventure trip from a service provider (not a public event). The employer’s employees can take part in the trip purchased by the employer. The costs of the expedition or hike are not considered tax exempt health promotion costs.

Sports and fitness facilities are public and in-house sports clubs, the cost of which is settled on behalf of the employee or reimbursed on the basis of an expense document.

Sports and fitness facilities include, for example:

  • stadiums, sports-specific fields and halls
  • gyms, artificial fields, halls, health trails, cycle paths
  • green areas, parks, streets, sports ground

As the primary purpose of the tax incentive is to support the regular health promotion of employees, the tax exemption does not extend to situations where the employer wishes to rent a sports complex or training facility for a short period of time, for example, for corporate sports days.

An in-house sports club is also, for example, a non-profit organization founded by employees, which has a membership fee to cover the sports expenses of its members.

Example

Health promotion expenses include regular participation in folk dance and ballroom dance classes, yoga classes, adult ballet and belly dance classes, swimming lessons, aerobics, gym (including sports club membership fees), table tennis training, hot yoga, and so on. Also, the costs of mobile apps and training videos offering various sports/training programs in the gym, on the health trails, at home, and so on.

Meditation and mindfulness, beauty salon services/treatments (for example, LPG, roller massage) and agility are not considered as expenses related to the place of sports or exercise.

Purchasing water park, spa, or sauna centre services without regular sports/training activities is not eligible for the tax incentive.

The tax incentive extends to expenses incurred by the employer in the maintenance of existing sports facilities (excluding investments). The employer can maintain existing facilities within the tax exemption limit. The ceiling is also set to 100 euros per quarter per employee and can be used for workers who use the sports facilities of the employer.

Example
Sports facilities include stadiums and sports fields, skating rinks, outdoor swimming pools, motorways, motorbike and bicycle tracks, racetracks, golf courses, beach facilities, springboard, roller way. Buildings and parts thereof which are not sports facilities (for example, gyms) are also covered with the tax exemption.

Expenditure on the maintenance of sports facilities includes, for example, costs directly related to the maintenance of the premises, which may include the repair, cleaning and running costs of facilities and equipment used for health promotion, such as electricity and water.

Please note that the price of a fringe benefit is not the market price for the use of a comparable gym, but the actual cost of maintaining it.

Example
An employer has set up a gym on its premises for its employees, which is regularly used by 10 employees. The cost of maintaining and cleaning the premises and equipment is 200 euros per month, and in addition, 150 euros for water and electricity, a total of 350 euros per month (or 1050 euros per quarter). As the tax exempt quarterly limit for 10 employees is 10 × 100 = 1000 euros, the excess, 50 euros, is taxed.

When an employer sets up a gym in the office and purchases new equipment for the gym, these expenses are related to business and these are tax-free expenses.

In order to qualify for the tax incentive, the service provider must be a rehabilitation physician, physiotherapist, activity therapist, clinical speech therapist or clinical psychologist registered in the National Register of Health Care Professionals, who provides their professional services.

The tax incentive does not apply if the service provider holds another professional certificate (for example, a massage therapist, lymph therapist, masseur, chiropractor, and so on).

For example, employees may require the services of a rehabilitation physician to prevent injuries, to recover to the fullest extent possible from a trauma, acute illness, injury, or long-term disability, or to maintain functionality. Employees may also need the services of a physiotherapist, activity therapist, clinical speech therapist or clinical psychologist to address health concerns. Specialist services from these professionals are eligible for tax incentive.

Healthcare professionals are registered in the National Register of Health Care Professionals.

The issued professional certificates are registered in the register of professions.

For a physiotherapist, the qualification is attested by a professional certificate of physiotherapist and/or physiotherapist’s diploma. List of physiotherapists

For activity therapists, the qualification is attested by a diploma of professional higher education or by a diploma accompanied by a professional certificate.

Example
The rehabilitation physician (who has a professional certificate of psychologist) has assessed the patient's health and, depending on the problem, prescribed different services for further recovery.

In agreement with the employees, the employer may conclude health insurance contracts with insurance companies to cover any medical expenses that may be incurred, or reimburse the employees exempt from tax on the basis of expense documents within the limit of the tax incentive.

Voluntary health insurance is necessary especially for those who, for some reason, are not covered by the Estonian Health Insurance Fund or cannot/do not wish to purchase coverage separately from the Estonian Health Insurance Fund.

Private health insurance is mainly intended for those who:

  • do not consider the services of the Estonian Health Insurance Fund sufficient
  • wish to use private health care institutions and
  • go abroad for treatment, if necessary

Example
An employer concludes a health insurance contract offered by the Estonian Health Insurance Fund for a person who is not covered by state health insurance (for example, the service is provided under a contract under the law of obligations and the monthly fee is lower than the minimum monthly rate of social tax liability).

If the period when the expense (benefit) is received differs from the period when it is paid for, the employer must select a method of accounting: whether it is based on quarterly costs (activity) or the payout. The employer has to use the method chosen consistently throughout the year and for all employees.

Examples

In the first quarter, an employer pays the premium in one instalment before the beginning of the one-year insurance period (prepayment), in the amount of 400 euros per employee per year. The accrual method of accounting is chosen which allows for the prepayment to be divided into quarterly expenses. If the limit is exceeded in one quarter, the amount in excess of the limit shall be declared for the quarter in which it was exceeded. 

In the first quarter, an employer pays an advance payment of 400 euros per employee to a sports club. The cash-based accounting method is chosen. The amount above the limit of 300 euros (400 – 100) is taxable. An employee submitted an invoice to his or her employer at the end of December 2018 in the amount of 400 euros, indicating the period of January to December 2018.

The employee used the sports service only in the fourth quarter, in the amount of 400 euros. The employer may reimburse the employee 100 euros exempt from tax, while the remaining 300 euros are taxed as fringe benefits.

Amounts in excess of the tax exempt limit shall be declared on form TSD, Annex 4, code 4120, to be submitted by the tenth day of each subsequent month. The tax liability of the fringe benefit is payable as normally, on the basis of the form TSD.

Part III of form INF 14 is used to declare total tax exempt health promotion costs borne or reimbursed during the calendar year within the limit (subsection 48 (55) of the Income Tax Act) and the number of employees to whom these expenses were covered or reimbursed during the calendar year.

On 1 February 2019, the first declaration on the tax exempt health promotion costs covered or reimbursed in 2018 was submitted. The declaration form can be completed for the year. The data are declared in the fourth quarter declaration.

Example
A private limited company has paid for health promotion expenses within the tax exempt limit for 3 persons (Jüri, Mari, Karl) in the first quarter, 4 persons (Jüri, Mari, Karl, Siim) in the second quarter, 5 persons (Jüri, Mari, Karl, Siim, Kärt) in the third quarter and 2 persons (Jüri, Mari) in the fourth quarter. The fourth quarter form INF 14 declares the number of employees as 5 (Jüri, Mari, Karl, Siim, Kärt) because their expenses have been tax exempt during the year.

Form INF 14 does not show the compulsory costs under subsection 13 (1) of the Occupational Health and Safety Act since these costs are business related and are not declared.

The price of the fringe benefit is calculated on the part exceeding the limit.

Example
An employer has concluded a contract for the use of a sports club for 500 euros per month (1500 euros per quarter). 10 employees are using this opportunity. The tax exempt quarterly limit for 10 employees is 10 × 100 = 1000 euros. The amount taxable with both income and social tax is 1500 – 1000 = 500 euros.

Taxation of fringe benefits for employer’s automobile

A fringe benefit arises if an employer enables the use of an automobile for private journeys. It means that not the use of an employer’s automobile for private journeys is important but enabling the use of an automobile. Likewise, the compensation of private journeys using an employer's automobile is not important because it does not change the taxation of fringe benefits.

The price of a fringe benefit on a new automobile is 1.96 euros per month for one kW and in the case of an automobile older than five years, the price of a fringe benefit is 1.47 euros per month for one kW. The engine power (kW) of an automobile can be found from the traffic register of the Estonian Transport Administration or from the registration certificate of the automobile (the technical passport).

In the case of a hybrid automobile, the basis is the maximum engine power (kW) of the internal combustion engine indicated in the traffic register of the Estonian Transport Administration or in the technical passport.
In the case of electric cars and gas cars, the basis is also the engine power (kW) indicated in the traffic register of the Road Administration or in the technical passport.

The price of a fringe benefit can be calculated on the basis of kilowatts in the case of a van as well (a vehicle of category N1) which the employer enables to use for private journeys.

As private journeys cannot be compensated on the basis of accounting any longer, therefore, keeping driving records is not necessary either. At the same time, if the employer wants to certify the use of an automobile for the purposes of business and service duties only, then it will be possible to keep driving records (for example, electronic GPS-driving records or the like). If it is certified that the employer enables the use of an automobile for service duties only, then no fringe benefits shall arise.

As the taxation of fringe benefits does not depend from the use of an automobile for private journeys and private journeys cannot be compensated on the basis of accounting, then even in the case the employer leases out the automobile to an employee at a preferential or market price, the tax liability on fringe benefits, nevertheless, shall arise on the kilowatt-based calculation.

If a car rental company or a lessor leases out an automobile to its employee as a customer with the rental market price, then the car rental company or the lessor will not have the tax liability on fringe benefits.

If an employer’s automobile cannot be used for private journeys, then the employer has to notify the Estonian Transport Administration about it.

If a company leases out an automobile to another company or a private person, then a notation shall be made in the traffic register of the Estonian Transport Administration that the automobile is used for tasks related to business only. A commercial lessor cannot ensure that the commercial lessee makes with the car only official journeys. If the commercial lessee enables its employees to use the automobile for private journeys as well, then regardless of the notation in the traffic register of the Estonian Transport Administration, the lessee shall have to declare and pay the taxes on fringe benefits for the automobile.

From the middle of December 2017 notifications can be submitted through the e-services of the Estonian Transport Administration. From 2 January 2018 it is possible to submit notifications in the service bureaus of the Estonian Transport Administration. 
More detailed information is available on the website of the Road Administration.

The Estonian Transport Administration shall be notified about enabling to use vehicles of category M1, i.e. automobiles, for service duties only. No notification is to be submitted to the Estonian Transport Administration in respect of the use of vehicles of category N1 (vans).

Fringe benefits for an employer’s automobile shall be declared on Annex 4 to Form TSD of the tax return by the tenth day of the following month. The tax liability on fringe benefits is usually paid on the basis of Form TSD.

The tax liability on a fringe benefit for a new car shall be 1.30 euros per month for one kW (income tax and social tax on 1.96 euros, income tax liability 1.96 × 20/80 = 0,49 euros and social tax liability (1.96 + 0.49) × 33% = 0.81 euros, thus, the total tax liability 0.49 + 0.81 = 1.30 euros), and for a car older than five years, 0.97 euros per month for one kW (income tax and social tax on 1.47 euros).

The cost of the fringe benefit shall be calculated on the engine power of an automobile (1.96 euros for one kW or, if the car is older than five years, 1.47 euros for one kW). Thus, for example, the price of the fringe benefit 1.96  × 190 = 372.40 euros for a new automobile with the engine power of 190 kW and the tax liability on it is 246.22 euros (income tax liability 372.40  × 20/80 = 93.10 euros and social tax liability (372.40 + 93.10) × 33% = 153.62 euros, thus, the total tax liability is 93.10 + 153.62 = 246.72 euros. The price of a fringe benefit for a new automobile with an engine power of 90 kW shall be 1.96 × 90 = 176.40 euros and the tax liability calculated on it shall be 116.87 euros (income tax and social tax).

Compensation paid for the use of a personal passenger car (automobile)

Below, we will explain the conditions under which an employer is able to pay a tax-free compensation to an employee for the use of a personal passenger car.

The procedure established in Government of the Republic Regulation No. 164 of 14 July 2006 (hereinafter Regulation) allows compensation to be paid for the use of a passenger car for business trips to:

  • an official (within the meaning of the Income Tax Act, an official is also considered to be a person specified in § 2 (3) of the Civil Service Act, such as a member of a local government council, a member of a rural municipality or city government, a judge, a member of the Riigikogu, etc.);

  • an employee (within the meaning of the Employment Contracts Act); and

  • a member of the management or control body of a legal person (within the meaning of § 9 of the Income Tax Act).

Thus, the owner of a company or a person providing a service by a contract under the law of obligations, cannot be granted a tax-free compensation under this regulation. However, they may be reimbursed for expenses incurred in the interests of a legal person pursuant to § 12 (3) of the Income Tax Act, if these expenses are documented.

Compensation can be paid for the use of a passenger car that is not owned or possessed by the employer. Thus, the passenger car does not have to be in the personal possession of the person using it, however, the right to use the vehicle must be proven. The right of use is fixed either on the vehicle registration certificate or in a power of attorney prepared by the owner of the vehicle. Vehicles of categories M1 and M1G are considered to be passenger cars.

Exceptionally, if the benefit is paid to a disabled person, the costs of using any motor vehicle can be compensated. According to § 2 of the Traffic Act, a motor power-driven vehicle is a vehicle that is powered by an engine. Vehicle is a device powered by a motor or in another power, designated for road traffic or driving on the road.

Payment of the compensation requires a written decision, directive or order of the employer stating the identity of the person receiving the compensation, the amount of the compensation and the date or period during which the reimbursed rides have been made. Copy of the document certifying the right to use the car shall be attached to the written decision. The decision may also be made for a period longer than one calendar month.

It is possible to pay tax-free compensation in case the rides are related to business (work rides) and about the rides are kept records or company has a logbook.

The logbook must contain data on the person using the passenger car, the vehicle’s registration plate data, the initial and final read-out of the odometer for each business ride, the date and purpose of each ride. It is not important whether the logbook is kept on paper or electronically – it must however contain the above-mentioned information. Consequently, the tax-free compensation cannot be paid for future rides, but only for past rides.

If the personal passenger car´s compensation has paid without keeping records (without the logbook), then the payment is considered as wage income, which must be declared by company in a personalised manner on Annex 1 of form TSD (on Annex 2 of form TSD if the recipient of car´s compensation is a non-resident).

The logbook can be used as a basis for compensating business rides in an extent of up to 30 cents per kilometre, but for no more than 335 euros for rides made in one calendar month. This means that the employer may also set a lower price per kilometre, such as 20 cents, but neither threshold may be exceeded in order to qualify for the payment of tax-free compensation. Thereby, if the price per kilometre of compensation is set to be 1 euro, the taxable part is the amount exceeding the price per kilometre, i.e. 70 cents, regardless of the total amount of compensation paid.

Compensation may also be paid to an employee summed up, i.e. more than 335 euros in one calendar month using cash-based principle, however, importantly, compensation per month must not exceed the prescribed monthly limit.

The amount of compensation in excess of the limit is considered to be a fringe benefit. If the amount of the calculated benefit exceeds the limit prescribed for a calendar month, the fringe benefit shall be calculated separately for each month and the fringe benefit shall be declared in the month in which the benefit was paid.

If the records are kept, a natural person may also receive tax-free compensation from several employers, the thereby limit of 335 euros shall then be applied separately for each employer. The compensation includes all expenses related to the normal use of the car (incl. fuel, insurance, etc.), except for parking fees paid while acting as an official, employee, or member of the management or controlling body of a legal person.

The price per kilometre prescribed in the regulation and the tax-free limit are not related to actual expenses (expenses documents). Although § 12 (3) of the Income Tax Act states that any compensation for certified expenses incurred for the benefit of another person shall not be deemed to be income of a natural person, then it is added that, the provisions of this subsection do not apply to compensations for which taxation separate terms, conditions and limits are established. Due to separate terms, conditions and limits having been established for compensation paid for the use of a personal passenger car, then the use of a personal passenger car (e.g. payment for tire change, current repair costs, etc.) is considered to be a fringe benefit (§ 48 of the Income Tax Act and § 6 of Regulation No. 2 of the Minister of Finance "Procedure for Pricing of a Special Discount" of 13 January 2011), except for parking fees paid for using the car related to job tasks official, employees or Member of Board.

Exceptionally, the expenses of a personal passenger car can be reimbursed based on an expense document if the business trip is taken on in a personal car and the reimbursement of these expenses is based on the so-called "business trip regulations": Government of the Republic Regulation No. 110 of 25 June 2009 or Government of the Republic Regulation No. 112 of 19 December 2012.

Generally, rides between the place of work and the residence are not considered as business rides related to business (job rides) and these cannot be reimbursed tax-free, under certain conditions this is however still possible. Rides between the place of work and the residence can be considered to be business rides (job rides), if it is not possible to use public transport to reach the destination within a reasonable time and with a reasonable cost. The same applies, if the residence of the employee working based on an employment contract, is located at least 50 kilometres from the place of work (§ 48 (51) of the Income Tax Act). In those cases, journeys between pleace of work and the residence are indicated thusly in the logbook and these journeys can be reimbursed tax-free in the extent of the general limit (335 euros).

Disabled person can be reimbursed, within the prescribed limits, for rides between residence and place of work, if these rides were kept records (has a logbook) and it is not possible to use public transportation of if the use of public transportation would significantly reduce the person’s ability to move and work.

Rides from home to work and back cannot be reimbursed tax-free due to the reason that it is easier and more convenient for a person to drive between home and work by private passenger car than by using public transportation.

Rides between the place of residence and the place of work can be compensated tax-free, if it is primarily necessary for the employer to perform its activities. This means that the employer’s interest in reimbursing travel between home and work generally prevails and the employer must be able to justify this interest, if necessary. The payment of compensation must be assessed separately for each person, depending on the person’s place of residence, work obligations, start of the working day, possibilities to use public transportation, etc. Having assessed all these factors together, the employer can decide whether or not it is justified to provide tax-free compensation for travel from home to work and back.

Example
An agreement has been concluded with the employee that the employee is ready 24/7 (on-call time) to solve problems arising in the course of business, so-called "crisis situations". Can rides between work and home then be considered as a rides related to business (work rides)?

On-call time is time when the employee is not obligated to perform work duties but is required to be ready to perform work duties, if the employer has given an order under the agreed conditions. As the employee is not able to fully concentrate on rest during on-call time and must be ready to perform work duties immediately, if necessary, then it is justified that the employee is paid 1/10 of the agreed wages for on-call time. On-call time can only be implemented if agreed between the employee and the employer.

Thereby, crisis management (on-call time) is business-related, as are job rides outside the daily place of work and back. In this case, rides between home and work is considered to be work rides. However, it must be borne in mind that imposing a purely formal obligation on employees to deal with crises does not entitle them to tax-free compensation for all rides between work and home. Such an obligation must be substantive, based on real needs of the employer and also correspond to the duties of the employee. 

Resident legal person, state agency or local government agency, sole proprietor and a non-resident with permanent establishment registered in Estonia or a non-resident acting as an employer, who has paid compensation to a natural person for the use of a car during a calendar year (incl. a disabled person) is required by 1 February of the following year (INF 14 will be submitted by 1 February 2021 for the year 2020) to submit declaration INF 14.

To submit form INF 14:

  1. enter the e-MTA
  2. select the section "Reports" and select "INF 14" from the list
  3. on the page listing the declarations, press the button "Add new declaration"
  4. choose "Quarter 4"

Form INF 14 shall declare the amounts compensated, indicating also the part exceeding the prescribed limit.

Examples

The order of the employer states that the employee shall be compensated work rides for the use of a personal passenger car if the employee is keeping a logbook. During the month of January, the employee was reimbursed for the use of a personal passenger car in the total amount of 400 euros (1,333 km x 0.3 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 65 euros (400 – 335) and in form INF 14 – the amount of 400 euros.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks in the amount of 335 euros. No logbook is kept. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
Nothing shall be declared in Annex 4 of form TSD or form INF 14, as no logbook has been kept. The amount of 335 euros is considered the income from employment (wage income) and it shall be declared in Annex 1 of form TSD.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of February, the employee was reimbursed for the use of a personal passenger car in the total amount of 335 euros (744.44 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 111.67 euros (744,44 km × 0.15 euros) and in form INF 14 – the amount of 335 euros.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of March, the employee was reimbursed for the use of a personal passenger car in the total amount of 675 euros (1,500 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 340 euros (675 – 335) and in form INF 14 – the amount of 675 euros.

Last updated: 03.11.2021

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