Tax obligations of employment income

Content

1. General obligations

2. Registration
     2.1. A non-resident operating in Estonia as an employer
     2.2. Registration of a non-resident employee
     2.3. Registration of employment

3. Taxes to be paid and withheld by an employer
     3.1. Income tax
     3.2. Social tax
     3.3. Unemployment insurance premium
     3.4. Funded pension payment
     3.5. Exemptions for social security payments

4. Examples of tax calculations
     4.1. In case an employee is a non-resident
     4.2. In case an employee is a resident

5. Concept of residency
    5.1. Resident
    5.2. Non-resident

6. Sumbitting tax returns

1. General obligations

There are four tax laws, which regulate directly the obligatory withholdings and payments of taxes in relation to payments made by employers to employees (natural persons) for salaried work performed by the latter. These laws are:

Income tax, unemployment insurance premiums (and funded pension payments for resident employees) have to be withheld and social tax and unemployment insurance premiums paid on all payments made to the employee and declared (on form TSD.
NB: There are new
TSD forms applicable since payments made in January 2015) and transferred to the Estonian Tax and Customs Board (Requisites for payment of taxes) by the 10th of every month, following the month of payment (i.e. on payments made in January tax should be withheld and transferred and declared to the Estonian Tax and Customs Board by February 10) by employer. This deadline encompasses all withholding taxes and payments made to employees.

All of the abovementioned taxes and payments are personified.

Taxes paid or withheld from payments made to

  • resident employee shall be declared on annex 1 of form TSD
  • non-resident employee shall be declared on annex 2 of form TSD

A non-resident operating as employer in Estonia has to pay income and social tax on fringe benefits granted to resident and non-resident natural person.

The taxable income of a natural person does not include fringe benefits.

Fringe benefits have to be declared on (in Estonian) annex 4 of form TSD to the Estonian Tax and Customs Board by the 10th of every month, following the month of granting fringe benefits by non-resident operating as employer in Estonia.

A non-resident operating in Estonia as an employer has same obligations even if the non-resident employer does not have a permanent establishment in Estonia.

2. Registration

2.1. A non-resident operating in Estonia as an employer

For registration a non-resident operating in Estonia as an employer has to contact or go to one of the service offices of the Estonian Tax and Customs Board:

Service Bureau in Tallinn
Estonian Tax and Customs Board
Lõõtsa Street 8A, 15176 Tallinn
phone 1811, (+372) 880 0810
e-mail emta@emta.ee

In order to be registered, an application on form R2 setting out the following shall be submitted:

  • the name of the non-resident employer
  • the postal address of the employer in the home country, if any
  • the postal address of the employer in Estonia, if any
  • the name and postal address of the person representing the employer
  • the signature of the employer or a person authorised by the employer

The following documents shall be attached to the application:

  • a copy of the articles of association or another document regulating the activities of the non-resident employer if available
  • a document certifying the authorisation of the person representing the employer
  • a specimen signature of the person which is notarised or officially certified by a tax authority
  • in case of tax representative, a written agreement between non-resident and his tax representative

2.2. Registration of a non-resident employee

In order to submit information to the Estonian Tax and Customs Board about payments made to non-resident and taxes paid or withheld on these payments, an Estonian personal registration code of a non-resident employee has to be shown on tax forms. When the Estonian personal ID-code has been given to a non-resident taxpayer, there will be no need to order a registration code from the Estonian Tax and Customs Board. But if the Estonian personal ID-code has not been given to the non-resident employee, the registration code has to be ordered from the Estonian Tax and Customs Board. The forms for application of registration code to the recipient of a payment can be found here.

2.3. Registration of employment

All the natural and legal persons providing the work are required to register the persons employed by them in the employment register.

You can find more information about it from "Registration of employment".

3. Taxes to be paid and withheld by an employer

3.1. Income tax

The income tax is withheld monthly by the employer at a rate of 20% (since 2015) of the gross salary of the employee. Certain deductions can be made from the tax base of the income tax.

These are the following (the list is final).

In case of resident and non-resident taxpayers:

  • withheld unemployment insurance premiums.

 In case of resident taxpayers only:

  • on a basis of employees written application, 1/12 of the annual basic exemption
    (170 EUR is 1/12 of 2040 EUR in 2016, 180 EUR (1/12 of 2160 EUR ) in 2017) – only one employer simultaneously,
  • withheld funded pension payment.

3.2. Social tax

The social tax is paid at a rate of 33% (there was a plan to reduce to 32,5% since 2017, but seems still remain to 33% as it was until 2016) on all payments made to employees for salaried work performed. Employers pay the social tax in full. There is always a minimum obligation on social tax to be paid, which is equal 33% (since 2017) of the minimum envisaged by the budget act annually.

  • In 2016, it is 128,70 EUR monthly, from 2017, it is 139,75 EUR

even if there were no payments for salaried work) for each employee who is entitled to 1/12 of the basic exemption with this particular employer. 

3.3. Unemployment insurance premium

An unemployment insurance premium is withheld at a rate of
1,6% since 2015
of the gross salary of the employee.

Pensioners are not entitled to unemployment status benefits and therefore they do not pay the unemployment insurance premium.
In addition to this, employers pay the unemployment insurance premium at a rate of
0,8% since 2015
of the amount of gross salaries monthly.

3.4. Funded pension payment

A funded pension payment is withheld at a rate of 2% for the persons under the obligation, which is envisaged by the funded pensions act.
If an employee had submitted such application, the rate can be 3%. 
Once having joined the obligatory funded pension system, one cannot disjoin it.
Also, everyone who was born after 1 January 1983 is automatically a person under obligation.

Funded pension payments were temporarily not withheld from payments made from 1 June 2009 until 31 December 2009.

From 1 January 2010 until 31 December 2010, a funded pension payment was withheld only if an employee had submitted an application for continuation of making payments in 2010.

In 2011, a rate of a funded pension payment depended on the employee´s decision in 2009. If an employee had decided to continue making payments in 2010, funded pension payments had been withheld at a rate of 2% in 2011.

In all other cases, funded pension payments had been withheld at a rate of 1% of the gross salary of the resident employee in 2011.

You can find further information about the Estonian system of pension payments on web-site of AS Eesti Väärtpaberikeskus (the Estonian Securities Centre, http://www.pensionikeskus.ee/).

3.5. Exemption for social security contributions

Social security contributions (social tax, unemployment insurance premium and funded pension payment) will not be paid or withheld in Estonia if the employee has a ceritificate of a posted employee (E101, A1) issued by the authorities of an EU country, or a country with which Estonia has a social security agreement (Canada, Ukraine).
 

4. Examples of tax calculations for payments made from 1 January 2017

The calculation is applicable to payments made from 1 January 2017.

4.1. In case an employee is a non-resident

A gross payment of 1000 EUR is agreed upon

  • an unemployment insurance premium of 8 EUR (0,8%) is to be paid by the employer
  • the amount of social tax of 330 EUR (33%) is to be paid by employer
  • a total cost to employer is 1338 EUR
  • an unemployment insurance premium of 16 EUR (1,6%) is withheld
  • an income tax of 196.80 EUR is withheld, calculated as 20% x (1000 – 16) = 196.80
  • a total net result received by the employee is 787.20 EUR, calculated as 1000 – 16 – 196.80 = 787.20

 4.2. In case an employee is a resident

A gross payment of 1000 EUR is agreed upon

  • an unemployment insurance premium of 8 EUR is to be paid by the employer (0,8%)
  • the amount of social tax of 330 EUR (33%) is to be paid by employer
  • a total cost to employer is 1338 EUR
  • an unemployment insurance premium of 16 EUR is withheld (1,6%)
  • the amount of a funded pension payment withheld 20 EUR (2% of 1000 EUR)
  • an income tax of 156.80 EUR is withheld, calculated as 20% x (1000 – 180 – 16 – 20)
  • 180 EUR is 1/12 of the annual basic exemption 2 160 EUR of income tax since 2017
  • a total net result received by the employee is
    805.20 EUR, calculated as 1000 – 156.80 – 16 – 20 = 807.20


5. Concept of residency

5.1. Resident

A person shall be deemed to be a resident as of the date of his or her arrival in Estonia. Thus, it is possible, that a person shall be deemed to be resident for one part of the period of taxation and non-resident for the other part of the period of taxation.

A natural person is a resident if one of the following conditions is met:

  • his or her place of residence is in Estonia
  • he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months. A person shall be deemed to be a resident as of the date of his or her arrival in Estonia
  • Estonian diplomats who are in foreign service are also Estonian residents

If the residency prescribed on the basis of an international agreement ratified by the Riigikogu (the Estonian Parliament) differs from the residency prescribed pursuant to the Estonian Income Tax Act, the provisions of the international agreement apply.

Thus, where by reason of the provisions of agreement between two countries that have concluded a tax treaty, a person is a resident of both contracting states, his status shall be determined according to the tax treaty.

Thus, if a natural person is deemed to be a tax resident in foreign country in the sense of the tax treaty, she or he will be considered to be a non-resident according to the Estonian Income Tax Act.

5.2. Non-resident

Non-residents (natural and legal persons) have a limited tax liability in Estonia, only the Estonian-source income is taxed.

According to the Estonian Income Tax Act, income tax is charged on income derived by a non-resident natural person:

  • from work under an employment contract or
  • in public service or
  • from activities engaged in on the basis of a contract for services, an authorisation agreement or a contract entered into for the provision of any other services under the law of obligations

If the non-resident performed his or her duties or provided the services in Estonia and at least one of the following conditions is fulfilled:

  • the payment was made by:
    • an Estonian state or local government authority or
    • Estonian resident or
    • a non-resident operating in Estonia as an employer, or
  • if the payment was made through the permanent establishment of a non-resident legal person registered in Estonia, or
  • if the person has stayed in Estonia for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months

If the tax treaty prescribes more favourable conditions for taxation of the income of non-residents than those provided by the Estonian legislation, the provisions of the tax treaty apply. According to the article 15 (2) of the tax treaty, remuneration derived by a resident of a contracting state in respect of an employment exercised in the other contracting state shall be taxable only in the first-mentioned state if:

a) the recipient is present in the other state for a period or periods not exceeding in the aggregate 183 days in any twelve-month period commencing or ending in the taxable year concerned, and

b) the remuneration is paid by, or on behalf of, an employer who is not a resident of the other state, and

c) the remuneration is not borne by a permanent establishment or a fixed base which the employer has in the other state.

6. Submitting tax returns

In general, the withholding taxes are final taxes for non-residents, and the non-resident recipient has no obligation to file an income tax return for income so taxed. If no tax has been withheld, form A1 has to be submitted by non-resident employee. The forms of tax returns for non-residents can be found here.

When the Estonian Tax and Customs Board has received your tax return, you can obtain the reference code necessary for the payment, at https://apps.emta.ee/e-service/doc/a0004.xsql or if you contact one of the service bureaus of the Estonian Tax and Customs Board.

Although non-residents generally may not claim tax deductions, there are specified deductions provided for in the Estonian Income Tax Act that can be made from the income subject to taxation in case a person, who is a resident natural person of another EU Member State or Norway, Island, Liechtenstein and who submits an income tax return of resident natural person.

Residents have unlimited tax liability in Estonia, the foreign income is included to their taxable income.

A resident natural person is generally required to submit an income tax return to the regional tax centre of the Estonian Tax and Customs Board concerning the income of a period of taxation not later than by 31 March of the year following the period of taxation.

The Estonian Tax and Customs Board shall calculate any additional amount of tax due and issue a written tax notice to this effect to the resident taxpayer.

This guideline is to be considered as informative and should not be treated as final. In specific cases one must act according to law. In case of questions, you are welcome to contact the tax administrator.


Amended in 27 December 2016
 

27.12.2016