Vehicle allowance and deductions

A vehicle allowance is a payment made for the use of an employee’s own car for the benefit of the employer. Such payments are considered taxable income, but it may be possible to claim a deduction for related expenses.

A deduction may be claimed against a vehicle allowance if the employee’s car has demonstrably been used for driving on behalf of the employer.

Withholding tax on vehicle allowances

A vehicle allowance paid as a fixed monthly or annual amount (without a mileage log) is subject to withholding tax. The employer must therefore withhold tax when the payment is made.

A vehicle allowance may be paid without withholding tax (income tax and municipal tax then settled in the tax return) if:

• the payment is based on a mileage log for each kilometer driven, and

• the amount paid per kilometer is in line with the rates determined by the State Travel Cost Committee.

If the vehicle allowance paid per kilometer exceeds the rate set by the State Travel Cost Committee, the employee must pay tax on the difference.

Deduction of expenses against a vehicle allowance

A deduction may be claimed against a vehicle allowance if the employee’s car has demonstrably been used for driving on behalf of the employer. The deduction cannot exceed the amount of the vehicle allowance.

A deduction is only permitted if both of the following conditions are met:

• a written usage agreement is in place that clearly describes the purpose of the travel, and

• a mileage log is maintained (which may be electronic) recording each trip, including the date, distance, purpose of travel, kilometer rate, the employee’s name and ID number, and the vehicle’s registration number. The total annual mileage of the vehicle must also be recorded. The records must be updated regularly and be available to the tax authorities upon request.

Please note that no deduction may be claimed against a vehicle allowance paid for travel between the employee’s home and workplace, or for any other use of the vehicle that is considered personal use.

The deduction is based on the total number of kilometers driven for the employer and the rate specified in the tax assessment guidelines.

Further information

• Deduction against a vehicle allowance: Article 30 of Act No. 90/2003 on Income Tax

• Conditions for paying a vehicle allowance without withholding tax: Article 2 of Regulation No. 591/1987 on wages, payments and benefits outside withholding tax

• Rules of the Directorate of Internal Revenue on benefits and deductions: Tax assessment guidelines

• Vehicle allowance – attachment to the tax return: Form RSK 3.04