How VAT works on passenger cars in Estonia 2025?
In Estonia, many businesses use passenger cars in their daily operations, whether for client visits, transportation, or logistics support. However, when it comes to VAT (Value Added Tax), there are some important rules and limits to be aware of. This guide breaks down how VAT deductions work when a company purchases or uses a passenger car, as well as how ongoing car-related expenses are treated under Estonian tax law.
The key rule to understand is this: only 50% of the input VAT can generally be deducted when it comes to passenger cars. This limit applies not only to the purchase or leasing of a car but also to related expenses like fuel, repairs, and parking. The logic behind this rule is that it’s assumed half of the car’s use is for private purposes and the other half for business, unless proven otherwise.
This restriction applies specifically to passenger vehicles classified under category M1, including M1G, which are vehicles that weigh up to 3,500 kilograms and have no more than eight passenger seats in addition to the driver’s seat. If your company is buying or using a vehicle that fits this category, the 50% VAT deduction cap will almost certainly apply.
The deduction limit also affects services and goods connected to the car, for example, fuel, spare parts, maintenance and repairs, or ferry tickets for transportation. All of these are considered related expenses and are therefore subject to the same 50% input VAT deduction rule.
It’s important to note that not everything connected to a car counts as a related expense. For example, if your company pays to place advertising on a car, those costs are not considered vehicle-related, but rather marketing expenses. Similarly, the purchase or rental of a trailer is not viewed as an expense related to a passenger car and is treated differently for VAT purposes.
What happens if an employee uses a company car?
What happens if an employee uses a company car for private trips, in addition to business trips? The answer is simple: the 50% input VAT deduction still applies. The law assumes that business and private use are split 50/50, and this standard rate can be applied regardless of the actual balance between private and business use.
However, there’s a special rule concerning the transportation of employees between their homes and the workplace. This is often considered private use in many tax systems, but under Estonian law, it’s not automatically treated that way. If certain conditions outlined in the Income Tax Act (Section 48, subsection 51) are met, such as lack of adequate public transport or shift-based work arrangements, then the use of the company car for commuting is still considered business use and doesn’t affect the VAT deduction rate.
In conclusion, when it comes to VAT on passenger cars in Estonia, the system operates on a default assumption of 50% business use. This simplifies VAT accounting for most companies but also requires awareness of exceptions and specific rules, especially in cases involving exempt activities or employee transport. If you’re unsure about how to apply VAT rules to your specific situation, such as determining if your use case meets the commuting exemption, it’s always wise to consult a tax advisor familiar with Estonian VAT law.
To get more information contact the accountants of 1Office Estonia.
