A company car is one of the most common benefits employers provide to employees. However, when a company vehicle is also used for private purposes, such use is treated under Croatian tax regulations as a benefit in kind, which is subject to tax and contributions in the same way as regular salary.
Incorrect determination of the benefit in kind is one of the more common irregularities identified by the Tax Administration during tax audits. It is therefore important to understand the calculation rules, correctly choose the method for determining the value, and keep appropriate records.
What is a benefit in kind?
A benefit in kind represents any advantage an employer provides to an employee that is not paid in cash but has a certain economic value for the employee.
The use of a company passenger car for private purposes is considered precisely this type of benefit.
Pursuant to Article 21 of the Income Tax Act and Article 22 of the Income Tax Ordinance, a benefit in kind is treated as salary and is subject to:
- personal income tax,
- mandatory social security contributions,
- all other levies calculated on salary.
Additional clarifications are provided in the Tax Administration’s Instruction on the Tax Treatment of Means of Transport (Class: 410-10/18-01/01, Reg. No.: 513-07-21-01/18-1, dated 27 March 2018).
How is the benefit in kind determined?
The Ordinance allows for three different methods of determining the value of the benefit in kind.
The chosen method is applied consistently, and each method has its own advantages and administrative requirements.
1. Method: 1% of the vehicle’s purchase value
The most commonly used method is a calculation equal to 1% of the vehicle’s purchase value per month, increased by VAT.
When determining the purchase value, the total value stated on the invoice for the purchase of the car is taken into account, including:
- the net value of the vehicle,
- VAT,
- special tax on motor vehicles (PPMV).
It is important to emphasize that the total value of the vehicle is used as the basis regardless of whether the company had the right to deduct input VAT upon purchase.
This method is applied regardless of how much the vehicle was actually used for private purposes during the month.
Example: A company purchased a company car with a total value of EUR 30,641.23 (including VAT and PPMV). The monthly benefit in kind amounts to: 30,641.23 × 1% = EUR 306.41
This amount is considered a net benefit and must be converted to a gross amount for the purposes of calculating tax and contributions.
2. Method: 20% of the monthly leasing or long-term rental installment
If the car was acquired through operating lease or long-term rental, the benefit in kind may be determined as 20% of the total monthly lease or rental installment, increased by VAT.
The calculation takes into account:
- the lease installment,
- VAT,
- the proportional part of any down payment made when the contract was concluded.
On the other hand, additional services such as:
- registration,
- technical inspection,
- regular servicing,
- insurance,
are generally not included in the basis for calculating the benefit in kind.
Example: The monthly lease installment amounts to:
- lease: EUR 400
- PPMV: EUR 50
- VAT: EUR 100
The total monthly installment is EUR 550. The monthly benefit in kind amounts to: 550 × 20% = EUR 110
If a down payment was made when the lease was concluded, its proportional part is also included in the calculation.
3. Method based on actual use
The third option is to determine the benefit in kind based on the vehicle’s actual use.
This method requires keeping detailed records of the vehicle’s use, namely:
- the date of use,
- the starting and ending odometer readings,
- the number of kilometers driven for private purposes,
- the purpose of the trip.
For each kilometer driven privately, EUR 0.50 is calculated.
Example: If an employee drove 200 kilometers privately during the month, the benefit in kind amounts to: 200 × EUR 0.50 = EUR 100
The advantage of this method is that it reflects the actual extent of private use, but it requires diligent and continuous record-keeping.
The benefit in kind represents a net amount
One of the most common mistakes in practice is the assumption that the amount of the benefit in kind can be entered directly into the payroll calculation.
However, the amount determined using any of the methods described above represents a net benefit.
Before the calculation, it must be converted into a gross amount, to which the following are then calculated:
- contributions from salary,
- personal income tax,
- contributions on salary.
How to choose the appropriate method?
The choice of method for determining the benefit in kind depends on the specific circumstances of the business, and there is no single solution equally suitable for all taxpayers. Several factors should be taken into account when making the decision, including:
- the method of acquiring the company vehicle (purchase, operating lease, or long-term rental),
- the extent and frequency of the vehicle’s private use,
- the number of company vehicles the company has at its disposal,
- the ability to keep the required records and the company’s administrative capacity.
The method of calculating 1% of the vehicle’s purchase value is most commonly applied in practice because of its simplicity and the fact that it does not require keeping detailed records of private use.
On the other hand, determining the benefit in kind based on actual kilometers driven can be more tax-favorable in cases where the company car is only occasionally used for private purposes. However, applying this method requires diligent and reliable record-keeping of all private trips, since these records form the basis for calculating the benefit in kind and for proving the accuracy of the calculation during a potential tax audit.
Before choosing a method, it is advisable to assess the tax and administrative effects of each model in order to select a solution that is both compliant with regulations and best suited to the specific business.
Most common mistakes in practice
During tax audits, the following irregularities are most commonly identified:
- failure to calculate the benefit in kind when an employee uses the vehicle 24 hours a day,
- incorrectly determined purchase value of the vehicle,
- failure to keep records of private kilometers,
- inclusion of costs that should not be part of the basis for the leasing method,
- failure to convert the net benefit into a gross amount before payroll calculation,
- inconsistent application of the chosen calculation method.
Proper recording of vehicle use and timely reconciliation of calculations can significantly reduce the risk of additional tax liabilities and subsequent corrections during a tax audit.
Conclusion
The use of a company car for private purposes represents a benefit for employees, but at the same time creates certain tax obligations for the employer.
Choosing the correct calculation method, maintaining proper documentation, and ensuring compliance with regulations are key to correctly calculating the benefit in kind and avoiding tax irregularities.
Since different vehicle acquisition models and usage patterns can have different tax consequences, it is recommended to analyze, before making a decision, which calculation method represents the most favorable and administratively most efficient solution for the company.
If your employees use company vehicles for private purposes as well, or if you are unsure whether you are applying the correct calculation method, CONEO Croatia can help analyze the tax treatment, align the calculation with applicable regulations, and prepare the necessary documentation for a tax audit.
