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Car taxes and company car expenses in Estonia: what every entrepreneur should know

Using cars for business purposes is one of the most common and, at the same time, most problematic areas of Estonian accounting. While entrepreneurs often perceive cars as ‘work tools’, from the perspective of Estonian tax legislation, they automatically fall into the category of potential personal benefit. This means they are subject to special control.

The situation will become even more sensitive in 2025–2026 when new taxes are introduced and attention to company expenses increases, meaning errors in car accounting will lead to additional charges. This is why the issue of car expenses cannot be put off or decided on intuitively.

Company car vs owner’s car: a fundamental difference

The first thing to understand is that the tax regime depends directly on who owns the car and how it is used. In Estonia, there is a clear distinction between the following situations:

  • The car belongs to a company (OÜ)
  • The car belongs to a private individual but is used for business purposes
  • The car is used for both work and personal purposes

Each of these models has different tax implications, and attempts to mix them without proper accounting almost always lead to problems.

What does it mean in practice to have a car on the company’s balance sheet?

When a car is registered to a company and recorded in the accounts as an asset, all expenses related to it are automatically subject to tax control. This applies to:

  •  purchasing or leasing a car;
  • fuel;
  • insurance;
  • maintenance;
  • repairs;
  • parking and road tolls.

The key question that the tax authorities always ask is: Is the car used exclusively for business purposes, or for personal use too?

Personal use of a company car incurs fringe benefits tax

If a company car is used for personal purposes by the owner, director or employees, a fringe benefit arises. In this case, the company is obliged to:

  • charge tax on the fringe benefit;
  • pay income tax;
  • pay social security tax.

The amount of the fringe benefit is calculated monthly, regardless of actual mileage, if personal use is permitted.

Special benefit for a car

Indicator Value
Special benefits base Fixed amount (depends on the power of the car)
Income tax 22
Social tax 33
Frequency Every month

Important: the absence of travel logs almost always implies personal use, even if the owner claims otherwise.

How to avoid special privilege tax

The only way to legally avoid this tax is to prove that the vehicle is used exclusively for business purposes. This requires:

  • keeping logbooks;
  •  recording routes and destinations;
  • not taking any personal trips.

In practice, this is possible, but it requires discipline. Most entrepreneurs eventually abandon this model because the administrative burden is too high.

Using a personal car for business

An alternative option is for the owner or an employee to use their personal car for the benefit of the company. In this case, the car is not on the company’s balance sheet and expenses are reimbursed.

Estonia allows compensation:

  • based on actual expenses (with supporting documents) or in the form of a fixed mileage allowance (within a set limit).

This option is often more tax-efficient, especially for small businesses and sole traders.

VAT and car expenses

The issue of VAT on cars is one of the most complex. The general principle is simple: VAT can only be taken into account for the proportion in which the car is used for business activities.

If the vehicle is used:

  •  only for business purposes: VAT on expenses can be deducted;
  • partly for personal purposes: VAT is subject to a proportional restriction;
  • mainly for personal purposes: VAT deduction may be prohibited entirely.

Errors in VAT accounting for vehicles are one of the most common reasons for adjustments to KMD declarations.

From 2025, a new motor tax will be introduced, which will place an additional burden on vehicle owners.

From 2025, an annual motor tax will be introduced in Estonia, payable by the vehicle owner. If the car is registered to a company, the company will pay the tax.

If paid by the company, it is considered an expense and affects the total cost of owning a car.

Although the motor tax itself is not a corporate income tax, it increases a business’s fixed costs and must be taken into account when choosing a car model.

Common mistakes made by entrepreneurs

In practice, the same problems are most often encountered:

  • The company car is used for personal purposes without special allowances being charged; there are no travel logs, or the logs are just formalities
  • VAT is deducted without justification; personal and corporate expenses are mixed; and the accountant receives incomplete information about the use of the car.

All these mistakes have one thing in common: they become apparent at the very first inspection.

Why are cars a high-risk area for OÜs?

A car is an ideal object for tax control:

Expenses are regular and easily comparable. They are often used for personal purposes and are perceived by entrepreneurs as ‘obviously work-related’.

This is why tax authorities pay close attention to this issue, especially in companies with a single owner and director.

Our recommended approach to cars in business

From a sustainable accounting point of view, there are three working principles:

  • Choose the car usage model in advance, not after the event.
  • Document everything related to travel and expenses.
  • Do not optimise ‘on a wing and a prayer’, especially when the tax burden is increasing.

A correctly chosen scheme is almost always cheaper than correcting mistakes retroactively.

In Estonia, a company car is not just a means of transport, but a fully fledged tax liability. With the increase in rates and the introduction of new fees in 2025–2026, the price of mistakes in this area will be even higher.

For entrepreneurs, this means one simple truth: if you have a company car, it must be accounted for correctly. Here, accounting plays a key role in protecting the business not only through calculations, but also by shielding it from unnecessary tax risks.