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The European Commission has recently granted Estonia’s request to maintain a specialized VAT measure that restricts the input VAT deductions related to passenger cars that are not exclusively utilized for business purposes.
This regulation, which was first introduced in 2014, allows for a VAT deduction capped at 50% for certain expenses linked with company cars, encompassing purchases, leasing, repairs, and fuel expenditures.
The new Council Implementing Decision means Estonia will implement this restriction until December 31, 2027. This extension aims to streamline VAT collection processes, alleviate administrative burdens on businesses, and curb tax evasion incidents stemming from the misreporting of vehicles used for personal reasons.
What Does This VAT Rule Mean for Businesses in Estonia?
Typically, businesses within the EU can recover VAT incurred on expenses associated with taxable activities. However, since company cars frequently serve dual purposes—both business and personal use—accurately tracking their usage poses significant challenges.
To simplify compliance, Estonia has adopted a simplified VAT deduction approach since 2014. Rather than requiring businesses to meticulously document mileage for business versus personal use, the government imposes a flat 50% VAT deduction limit for eligible passenger cars.
This approach applies to:
- Purchases, leasing, intra-Community acquisitions, and imports of passenger vehicles
- Expenses related to repairs, maintenance, and fuel costs
Certain vehicles remain exempt from this VAT limitation, allowing businesses to claim full VAT deductions for:
- Cars purchased for resale, hire, or lease
- Taxis and other vehicles used for paid passenger transport
- Cars employed for professional driving instruction
Why Is Estonia Extending This VAT Restriction?
Estonia’s tax authorities maintain that a significant proportion of company cars are primarily used for private purposes. Current government statistics indicate that personal usage constitutes approximately 60% of total company car mileage, reinforcing the rationale behind preserving the VAT deduction cap.
The continuation of this policy aims to achieve several objectives:
- Mitigation of tax evasion risks due to inaccuracies in reporting private use
- Simplification of VAT calculations for businesses
- Reduction of administrative pressures for both taxpayers and tax officials
What’s Next?
The current VAT deduction restriction will be valid until December 31, 2027. Should the government seek to extend this regulation further, it must submit a formal request along with a review report to the European Commission by March 31, 2027.
Businesses operating in Estonia should stay the course by applying the 50% VAT deduction rule for relevant company car expenses. Moreover, it is crucial for companies to remain updated on potential changes to VAT regulations as the 2027 deadline approaches.
Final Thoughts
This VAT policy reflects a broader trend in the European Union, where several member states, such as Hungary, Latvia, Croatia, Poland, Italy, and Romania, have also enacted similar restrictions on VAT deductions for company vehicles.
For Estonian businesses, grasping and adhering to these VAT regulations is vital to help avert unexpected tax liabilities. By maintaining accurate records and staying informed about compliance mandates, companies can efficiently navigate the evolving tax landscape in Estonia.
You might also want to know about Tax Rates for Small Businesses in Estonia 2025
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