The Chamber of Commerce proposed raising tax-free cap on personal car use allowance

The Estonian Chamber of Commerce and Industry turned to the Ministry of Finance with a proposal to increase the tax-free limit of the personal car use allowance provided for in the Income Tax Act from the current 0.30 euros to 0.45 euros per kilometre, but to the maximum extent from the current 335 euros to 500 euros per month.

In its address, the Chamber of Commerce cites a number of reasons for raising the cap on tax-free compensation, pointing out that the cap has not been raised for almost 10 years, while there has been rapid inflation over the past 10 years. Since the last increase in the cap on tax-free compensation, the consumer price index, including fuel prices, costs related to passenger cars and their maintenance and use, has increased significantly. According to Statistics Estonia, the consumer price index was 62.6% higher in December 2023 than in January 2011 and 49% higher than in September 2014.

The address also points out that the current limit does not allow for compensation for work journeys in the earlier volume and increasing the limit would help to reduce the number of passenger cars used in Estonia or at least hinders its growth.

“If the tax-free compensation threshold is raised, i.e. employers will be able to compensate the employees for the actual and necessary costs incurred by an employee in connection with the use of a personal passenger car for business journeys, the need for passenger cars owned or held by the employer will be reduced. Thus, it is possible to make both personal and professional journeys with an employee's personal car and the need to own a personal car and at the same time use the employer's car is reduced,” said Mait Palts, Director General of the Estonian Chamber of Commerce and Industry, and found that the current regulation does not favour the use of a personal car for business journeys, but rather favours the use of two passenger cars, but this should not be the case.

According to the Chamber of Commerce, the increase of the tax-free limit on compensation does not entail a high risk of misuse, since the principle remains that, in order to benefit from the exemption, a record must be kept of the business trips, that is to say, a journey log, which must indicate, inter alia, the initial and final reading of the mileage meter for each business trip, as well as the date and purpose of the business trip for each business trip. In addition, the Chamber of Commerce points out that the cap on compensation is an option, not an obligation for employers.

The Chamber of Commerce also made a similar proposal in September 2022. Then the response from the Ministry of Finance was that the tax-free limit for personal car use allowance provided for in the Income Tax Act should be changed, but a thorough analysis needs to be carried out in advance to find ways to make the corresponding change.