The company can allow its employees to use company vehicles for work-related tasks, that is, for activities directly related to the company’s operations. Additionally, there is a way for the company to authorize employees to use company cars for personal needs. More information on this topic follows – the method of using the company car, whether tax is paid for using the company car, and other questions.
On the one hand, the company approves the use of company vehicles for individuals employed by that company. However, the use of company vehicles can also be extended to individuals with a different type of employment contract. Specifically to those not employed (not in an employment relationship) by that company.
This is only possible under one condition – the company vehicle is used to perform tasks for the business entity’s needs. The continuation covers this topic in detail.
1. The Way to Use Company Vehicles
There are several ways to use company vehicles and other transportation means owned by the company:
- Using a company vehicle during working hours or outside working hours solely for business purposes or company needs.
- Using a company car for private purposes – the vehicle is owned by the employer but used for the employee’s private needs (a contract for using the company vehicle for private purposes is established).
In practice, company vehicles are most commonly used for work purposes. However, it should be noted that there is a legal possibility and way to allow employees to use the company car for private purposes. In that case, using the company car for personal needs is treated as a benefit and as the employee’s income. This income is taxed – taxes and contributions are paid based on earnings.
The use of a company vehicle or other company transportation means must be regulated by special documents, whether it is for business or private purposes:
- By the employer’s general act (Work Regulations, collective agreement, or another act) or
- By a contract between the employer and the employee (employment contract, company vehicle usage contract, etc.).
In this way, all criteria regarding the manner of use, purpose of use, compensation, expenses, and others are defined. It also determines under what conditions the transportation means are used for private purposes and under what conditions are used for official purposes.
1.1. Private Vehicle for Official Purposes and Rental
We wrote that there is a way to use a private passenger vehicle for company purposes. An employee can use it for official purposes, as well as for their own private needs. A decision is made in advance regarding the use of a private vehicle for official purposes, or a contract is concluded for the lease of a private car for official purposes.
In that case, approval must be granted for using the private passenger vehicle for official business trips. The employee owns the car, but it is used for official travel within the country or for official travel abroad.
The company can also use a vehicle owned by another person (rental) or a vehicle owned by a leasing company from which it pays compensation for use until it is purchased – buying a company car or using a vehicle with purchase. In these cases, a rental or lease agreement is concluded until the right to purchase is acquired.
1.2. The Use of Company Vehicles
Specific documents must regulate the use of a company vehicle or any other means of transportation, whether for business or personal purposes. This can be done through:
- Company regulations (Work Regulations, collective agreement, or other regulations) or
- Contract between the employer and the employee (employment contract, vehicle use agreement…).
This way, all criteria regarding the manner of use, purpose, compensation, expenses, and others are defined. It also determines under what conditions the vehicle is used for personal purposes and under what conditions for official ones.
1.3. The Usage of the Company Car Solely for Business Purposes
When an employer approves an employee’s use of a company vehicle for business purposes, it means they can only use it to carry out duties and tasks related to the company’s activities and operations. In that case, the vehicle is used solely for official needs (during working hours, outside working hours, and commuting to and from work). The employer covers all expenses and fees related to usage, maintenance, and other costs.
1.4. Using Company Vehicles for Personal Purposes
When the employer approves the use of the vehicle for private needs, it means that the employee receives a benefit of a certain value for using the car, and in that case, it is treated as income. The employee’s basic salary is then increased by the value of that benefit (for the use of the official car). Taxes and contributions are paid on it, just like on income.
An official and documented decision must be made by the employer for an employee to be able to use the company’s vehicle for their personal needs. This issue is usually defined by the general act. For a specific employee who will use the car, a Decision on using the official vehicle for private purposes is made. After that, the employer and the employee sign a contract by which the employee gains the right to use that official car for their personal and private needs.
Contracts governing this issue are:
- Contract for the use of the official vehicle for private purposes,
- Employment contract.
Also, the employer and the employee define other issues related to the conditions and obligations regarding using the official car by contract. These include:
- Period of use of the official vehicle;
- Vehicle name, brand, and registration number;
- Whether compensation for use is paid or not (whether it is a lease);
- If paid, in what amount;
- Method or payment schedule – one-time or multiple (monthly, quarterly, semi-annually…);
- Whether the costs/expenses for the use of the vehicle and ongoing maintenance (fuel, lubricants, service, registration, minor repairs, spare parts, oil change…) are borne by the employer or the employee;
- The kilometers traveled on the day of taking over the official vehicle.
One more note.
The employer may allow the employee to use the official vehicle for private purposes regardless of vehicle ownership. In other words:
- The employee can use the official car even when the employer is the owner of the vehicle,
- The employee may be allowed to use the leased official vehicle for private purposes (when leased for company needs – the employer is the lessee, recipient of leasing, etc.).
2. The Tax Treatment of Using a Company Vehicle for Personal Needs
When it comes to the tax treatment and payment of taxes for using a company vehicle, there is a tax obligation, and the employer is responsible for it. According to the Law on Personal Income Tax, using a company vehicle and other means of transportation for personal purposes is considered income because it is provided as a benefit. Income tax and contributions for mandatory social insurance are calculated and paid on it.
According to the provisions of the Law on Personal Income Tax (Article 14a, paragraph 1), the use of a company vehicle and other means of transportation for personal purposes is treated as income received based on providing a benefit to the employee. According to the Labor Law, it is prescribed that salary includes earnings derived from employment and all other earnings of the employee. Earnings based on the benefit of using a company car for personal purposes are considered other earnings.
According to the Law on Personal Income Tax, other earnings considered as income include:
- Receipts in the form of vouchers;
- Receipts based on securities (except for shares acquired in the process of property transformation);
- Receipts from cash vouchers;
- Receipts in the form of goods;
- Receipts are obtained by providing a benefit, forgiving debt, or covering the taxpayer’s expenses with cash compensation or direct payment.
In connection with the above and per the Law, using a company vehicle for personal purposes is considered income-based on providing a benefit. Income tax and contributions for mandatory social insurance (included in the calculation base) are calculated and paid on the mentioned income. The employer is responsible for paying taxes and contributions for the use of a company vehicle for personal purposes.
If an employee receives other income to cover expenses related to the use of a company vehicle for personal purposes, specifically for fuel, lubricants, services, maintenance, and other expenses covered by the employer, then those costs are also considered other earnings because they arise in connection with the use of the vehicle. Per the Law on Personal Income Tax, the payment of costs and maintenance incurred by using the car is considered income based on providing a benefit to the employee and covering the taxpayer’s expenses with cash compensation or direct payment. They also form the basis for calculating income tax and contributions for mandatory social insurance.
2.1. Tax and Contributions for Using the Company Car for Private Purposes
The fees that the employer is obligated to pay for using the company car for personal needs, based on the gross value, are:
- Income tax,
- Contributions for pension insurance – both borne by the employee and by the employer,
- Contributions for health insurance – both borne by the employee and by the employer,
- Contributions for unemployment – both borne by the employee and by the employer.
2.2. The Income Tax for the Use of Company Vehicles for Private Purposes
All mentioned earnings related to the use of a company car are also subject to taxation for personal income tax (income tax must be paid).
Other earnings of an employee arising from using a company car for private purposes are included in the base for calculating the annual personal income tax. This also applies to other earnings for covering expenses related to using the vehicle, which the company pays the employee.
If the employee pays the employer compensation for the use of a company car for private purposes from their net salary (the salary on which taxes and social contributions are calculated and paid), the base for calculating the salary is reduced by the amount of that compensation. Also, the compensation amount is not included in the base for calculating and paying annual income tax.
If you have any additional questions regarding the use of company vehicles, tax treatment, or taxation related to personal vehicle use, feel free to contact us. Experienced experts from the accounting agency HLB T&M Consulting, consisting of licensed, certified accountants and tax professionals, can provide you with comprehensive accounting services.
