Kilometre allowance and per diem allowances – taxable or tax-exempt?
The kilometre allowance and per diem allowances are tax-exempt reimbursements of travel expenses if the payer is an employer and the recipient is an employee. The simplest situation is when the employee’s main place of work is in one location and they travel to another location on a business trip. In this case, the costs associated with the trip are easy to calculate and reimburse.
However, the situation becomes more complicated, for example, in cases where the employee does not have a permanent place of work, i.e. the nature of their work or specialty is itinerant, or the employee works at several different places. The payment of tax-exempt allowances may also be open to interpretation in the case of, for example, temporary agency workers.
What is the basis for the payment of kilometre and per diem allowances and the tax exemption?
Collective agreements and employment contracts determine what travel expenses are to be reimbursed by the employer. In addition, workplaces may also have general practices that determine the allowances paid to employees.
However, collective agreements, employment contracts or general practices do not determine which reimbursements of travel expenses are tax-exempt; that is defined in the Tax Administration’s decision on allowances for travel expenses. The provisions of the collective agreement and the decisions of the Tax Administration may differ in their terms and amounts. Problems can arise if all reimbursements of travel expenses specified in the collective agreement are automatically considered tax-exempt.
Differences between sole proprietorships and limited companies in the reimbursement of travel expenses
From the employee’s point of view, the reimbursement of travel expenses works in the same way regardless of whether the employer company is a sole proprietorship or a limited company. In both cases, employees can invoice their own travel expenses.
From the owner’s point of view, however, there is a difference between sole proprietorships and limited companies. With a limited company, the owner can also invoice their own business travel expenses tax-exempt from their own company. In the case of sole proprietorships, entrepreneurs cannot invoice travel expenses from themselves.
However, sole proprietorship entrepreneurs are not at a disadvantage compared to their employees in terms of travel allowances, as they can receive an additional tax deduction for business travel expenses. In other words, sole proprietorship entrepreneurs are not paid their own business travel expenses directly in cash, but can, if the conditions are met, make an additional deduction for temporary business trips and increased living expenses to the extent that the expenses have not been deducted in the accounts. The maximum amount of the additional deduction is the amount of tax-exempt per diem and kilometre allowances. An additional deduction corresponding to the kilometre allowance can be made if more than 50% of the car’s trips are private driving.
What happens if there are errors in the reimbursement of travel expenses?
Errors in the payment of tax-exempt allowances affect the taxation of both the employer and the employee. It is the responsibility of the payer to ensure that any withholding tax has been submitted correctly. If an employee has been paid allowances as tax-exempt when they are not tax-exempt according to the Tax Administration’s decision, the amount paid is considered to be wages. In this case, both salary-related expenses and penalty fees are to be paid in arrears.
In situations where there are uncertainties regarding the reimbursement of travel expenses, it is a good idea to confirm the tax treatment of allowances by applying for a preliminary ruling from the Tax Administration before payment of travel expense reimbursements.