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Car benefit in Finland - When can an entrepreneur use it and how does it affect taxation?

Which types of companies are eligible for the car benefit?

A company car is a benefit treated as a salary. The owner of a limited company or a partnership can have the car benefit, even if the shareholder does not draw a cash salary. A sole proprietor cannot pay themself a salary, so the car benefit is not possible for sole proprietors.

When should a shareholder of a limited company consider a car benefit?

The car benefit means that the company car is also used privately. The car belongs to the company and the company takes care of the costs of the car.

For a company car, the company usually pays for everything except the fuel or running costs. For an unlimited company car, the company pays for all the costs of the car. As there are no costs for the employee with an unlimited car benefit, the company cannot pay tax-free kilometre allowances. With a company car, tax-free kilometre allowances may be paid by a decision of the Tax Administration. In 2022, the allowance is 10 cents/km. Tax-free kilometre allowances can only be claimed for commuting by a decision of the Tax Administration. It is important to knowledge that the journey between home and work is not a business trip, but a private journey.

Before looking at the tax aspect, it is worth looking over the following issues when considering a car benefit for a shareholder:
  1. For which does the shareholder need the car more: For private or business trips?
  2. Is it possible to use a similar car for both business and private trips, or do different cars meet these needs?
     
If you decide to take on a car benefit, it can be worthwhile if...
  • A person has a high income and a high tax rate - In this case, it may be more tax-efficient to take the car benefit than to pay for the cost of using a car out of their net salary
  • The car is expensive - It may be more beneficial to buy a car of a higher price level than a company car
  • There are high commuting and car costs - Tax-free kilometre allowance would not cover the cost of the car if you owned it yourself
     
It is better to buy a private car and not use the car benefit, if...
  • The car you are buying is inexpensive - It may be cheaper to claim a tax-free kilometre allowance from the company and pay for the running costs of the car yourself if the car in question is cheap in terms of capital costs and is used a lot for commuting

Car benefit in corporate taxation

The car benefit is a taxable fringe benefit, so the company has to pay withholding tax and indirect expenses. If a shareholder working for the company does not draw a salary but takes a taxable car benefit, the benefit cannot be subject to withholding tax. In this case, the car benefit will be taxed at the final taxation of the recipient. The company must declare the car benefit in the income register.

The cost of the car benefit is deductible in the company's accounting and taxation, except for the VAT on the car.

Read our expert's comments on the subject here: Is car VAT deductible for corporate taxation? | Accountor Finland

 

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Car benefit in an entrepreneur’s personal taxation

Ordinary fringe benefits for a shareholder or partner working on behalf of a company they own are valued by the decision on benefits, if...
  • The fringe benefits have been properly treated as salary income in the accounting
  • The fringe benefits have been declared to the income register with a payroll declaration

If no cash salary has been paid to the shareholder and no withholding tax has been paid, the withholding tax on the fringe benefit is due when the final tax return is completed.

If the shareholder has paid compensation to the company for the private use of the car, this is taken into account when calculating the value of the car benefit.

The value of the car benefit is affected by the amount of private and business trips. The monthly value of the car benefit is calculated on the estimate of 18 000 kilometres of private trips per year. If the private trips are consistently less than that, the employee can obtain a more favourable taxation value by keeping a logbook. If the annual commuting exceeds 30 000 km, the basic value of the car benefit is 80% of the normal value. The value of the car benefit may also be increased when submitting the tax if it is evident that the private trips exceed 18 000 km during the year. Because private trips also include commuting between home and workplace, the limit is exceeded for example on a one-way journey of 41 km, calculated based on 220 working days.

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Temporary reduction of the car benefit for electric and hybrid cars

In 2021, a temporary reduction in the car benefit for fully electric cars came into effect. The car benefit reduction for electric cars is 170€/month from 2021- to 2025. This car benefit reduction applies to cars first registered in Finland from 2020 onwards.

In 2022, the car benefit for hybrid cars will also be reduced. The reduction for hybrid cars is half of the reduction for fully electric cars, i.e., 85€/month. The discount is valid from 2022 to 2025 and applies to low emission cars first registered in 2021 and after.

The reductions for electric and hybrid cars apply to both the unlimited car benefit and the car benefit.

In addition, according to the 2022 decision on fringe benefits, the unlimited car benefit will be reduced...
  • 8 cents/km or 120€/month if the only possible driving power is electric
  • 4 cents/km or 60€/month if the car is charged from an external source and is powered by electricity and petrol, electricity and diesel, or methane fuel

The unlimited car benefit can therefore be reduced by 290€/month for a fully electric car and 145€/month for a hybrid car.

Sanctions for misuse of the car benefit

If a shareholder of a limited company uses a company car for private trips without compensation and the car benefit is not recorded in the payroll accounting, the usage of the car for private trips is taxed as a hidden dividend. The costs of the car are not accepted for company taxation and the hidden dividend is taxed as earned income in the shareholder's taxation. Usually, these are discovered during tax inspection, and the shareholder and the company will incur interest and sanction fees in addition to the increase in income.

Tax can nowadays be adjusted backwards by three years and if the car benefit is taxed retrospectively as a hidden dividend, the payment penalties can be extensive. For the taxation, the use of a car can be investigated for example by examining refuelling, other costs incurring from using the car, purchases made while travelling, or even bank account transactions of the shareholder and their family members. The Tax Administration has a broad statutory right to access information which allows it to investigate these individual transactions.

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