Using a company car for personal needs. Why is it important not to hide it?

The State Tax Inspectorate (VMI) closely monitors how company cars are used for personal purposes. The use of company cars for personal purposes, not only for business needs, is an important and sensitive issue that company managers need to consider carefully. In this article, we will discuss why it is essential to be open about using cars for personal purposes, the applicable taxation, and why it is important not to hide it.

There is no additional fees for a car used for business purposes, but it is important to assess whether the car is necessary for the company’s operations. The benefit that derives from an employee using the employer’s car for personal purposes is taxed in the same way as employment-related income. Companies must calculate and declare this benefit, and employees must pay the respective taxes that are calculated based on the rental market value of the car or the market price of the car.

When a company decides to allow employees to use its own car for personal purposes, including commuting between home and work, the employee and employer can choose one of the two methods to calculate this benefit:

The first option can be applied only if the company-owned car is used in the company’s operations, e.g.: if the employee drives it while performing job functions and also uses the car for personal purposes. It is important to note that once the employer chooses to apply the percentage of the fair market value of the car, this choice cannot be changed until the end of the fiscal year. If the choice is made to calculate the benefit based on the actual market value of the car rental, the decision can be changed, but it requires recalculating the income employee received from the beginning of the year up to the point of switching to the other method.

Market price is the amount determined by the seller and buyer during a transaction to achieve maximum mutual benefit. The market price can be determined based on publicly available car sales prices or price found in the insurance policy. Another way to find information about vehicle prices in Lithuania is to use the VšĮ 'Emprekis' platform. The company manager can choose the most convenient calculation method and apply it within the company. Here is an example of how one of the above methods can be calculated.

Example

The employer allows the employee to use a car for personal purposes, market price of the car being €25,000 including VAT. The company also covers the fuel costs, so the rate applied is 0.75% of the market price. The employee’s benefit in kind amounts to €187.50 (€25,000 * 0.75%).

Taxes can be deducted from the employee’s salary, or the company can cover them from its own funds. If the company pays the calculated taxes from its own funds, this amount is not an allowable expense for profit tax purposes. The amounts of applicable taxes may vary depending on whether the employee’s personal allowance (NPD) is applied.

For other calculation methods and information on how to correctly pay and account for taxes, you can discuss with your assigned accountant. Your accountant will ensure that the calculated VAT is correctly declared and will make the necessary accounting entries.