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Support to low-wage employees in 2017

Income tax refund for low-wage employees is an annually paid support, with the aim of increasing the income of full-time low-wage employees. An employee is entitled to receive a refund of income tax the exact amount of which is calculated on the basis of the data of the income tax return of the person.

Conditions for applying for support
How to apply
Application for the support
Calculation of the support
Support calculation procedure
Restoration of the term for submission of application
Payment of support
Reclamation of support
Deadlines

Conditions for applying for support


All the conditions for applying shall be met in 2016 in at least six calendar months.

Accordingly, upon submission of an application, it is verified whether the person, during six calendar months in 2016:

  1. was a resident of Estonia,
     
  2. was at least 18 years of age,
     
  3. was working under at least one employment contract or was in a service relationship during an entire month, and the employment or service was not suspended,
  4. was working for at least one employer full-time or for several employers combined, adding up to full-time. The requirement of full-time employment does not apply to persons receiving pension for incapacity for work or persons with a reduced work ability.

    To receive a low-paid employee’s benefit, no full time requirement shall be applied to all persons receiving pensions for incapacity for work or persons with decreased working ability. Employees or employers shall not inform the Estonian Tax and Customs Board about the pension for incapacity for work or the decreased working ability because the Estonian National Social Insurance Board and the Estonian Unemployment Insurance Fund shall forward the necessary data to the Estonian Tax and Customs Board themselves at the beginning of February of a current year. After that it shall be displayed in the e-Tax /e-Customs to all pensioners receiving pensions for incapacity for work and persons with decreased working ability that the full time requirement is fulfilled.

    The condition of having worked for the full calendar month is not met if, for example, a person worked from 7 to 31 March. Moreover, if, for example, a person worked from 4 April to 23 September last year, the condition to work for the full calendar month is only met in May, June, July and August, and not met in April and September.

It is possible to apply for the support if the annual income of the employee is less than 7,817 euros.
 

How to apply

 

In the e-Tax Board/a-Customs

Entry in the e-Tax Board/e-Customs:

  • with ID card
  • with mobile ID
  • via Internet bank – all customers of SEB Bank, Swedbank, Danske Bank, Nordea Bank, Krediidipank (Credit Bank), LHV and Versobank who have concluded an agreement for use of the e-Tax Board/e-Customs through their internet bank
  • with a username and password received after concluding an authentication agreement in a service bureau of the Estonian Tax and Customs Board

In order to get a refund for low-wage employees you first need to submit an income tax return, which can be done as from the 15th of February. An application for refund can be lodged after you have confirmed your income tax return in the e-Tax/e-Customs.

If the conditions for receiving the refund are fulfilled (your annual income was less than 7817 euros) according to the data at our disposal, the information on the refund for low-wage employees will be displayed on the last page of the income tax return, where you will also find the link which directs you to lodging of an application.

Our system will then check whether all the other criteria of getting the refund are met as well, and after that you can confirm your application and see the amount of your refund right away.

If it happens that the application of refund has not been lodged as described above – e.g. you did not notice the instruction etc., there is another option: after submitting your income tax return log in to the e-Tax/e-Customs again, select the menu item "Data from employers", then “Refund for low-wage employees”. On this page you can check whether you are eligible for the refund and also lodge the application.        

The application for refund can be lodged if all the conditions for applying are fulfilled according to the data at our disposal; otherwise it is not possible to apply.

In a service bureau

For the verification of data and submission of an application in a service bureau, you can choose between two options:

  • client’s computer in a service bureau

    In each service bureau there is a computer at your disposal for filling in tax returns through the e-Tax Board/e-Customs. A service bureau official is there for your assistance.
  • paper forms without pre-filled data

    Blank paper forms without any pre-filled data are available in the service bureaus.

By post

The support application can be sent to the service bureaus of the Estonian Tax and Customs Board by post.

 

Application for the support


The conditions for application for the support as well as the grounds for payment are set out by Art. 371 ̶ 377 of the Labour Market Services and Benefits Act.

The right to apply for the support does not apply to persons whose product of multiplying

  • taxable income (including income from abroad),

  • wages and other remuneration received abroad, and dividends which are not subject to income tax in Estonia,

  • dividends or payments from the owners' equity received from an Estonian company, which is taxed at the company level,

of the year 2016 and the coefficient of 0.35 exceeds the rate, established by the State Budget Act of 2016 and constituting the grounds for calculation of the support, of 228 euros a month, or 2,736 euros per year.

This means that the persons whose annual income is less than 7,817 euros (2,736 ÷ 0.35) are eligible for receiving the support. Total income of a person, including salaries and other remuneration, service charges received pursuant to a contract under the law of obligations, business income, income from the transfer, lease and rental of assets, licence fees, interest payments, dividends, taxable pension, support, scholarships, bonuses, compensation or other income is deemed to be income.

For example, an employee who has worked full-time throughout the calendar year and received a salary of 430 euros per month receives 5,160 euros per year as income. If an employee does not have other income and deductions (such as housing loan interest), then the employee is entitled to a refund of approximately 587 euros (monthly withheld income tax 48.90 x 12 = 586.80).

At the same time, for example, an employee who is a pensioner and who has worked full-time throughout the calendar year, and received, in addition to a salary of 430 euros per month, old-age pension of 395 euros per month receives 9,900 euros per year as income. As the income of the employee exceeds the threshold (7,817 euros), the employee is not entitled to a refund.

The support cannot be applied for by an employee whose annual income is less than 7,817 euros but whose refund amount is 0 euros in any case. In particular, this may occur in situations where a person is eligible for an income tax refund due to deductions allowed by the Income Tax Act (for example, increased basic exemption upon provision of maintenance to child, housing loan interest, training expenses, donations, etc.).

The support is exempt from income tax for the person (pursuant to Art. 19 (3) clause 3 of the Income Tax Act). However, be aware that the support increases the person's income and therefore the support is taken into account as income upon calculation of subsistence benefit for the person (for example, upon grant of subsistence benefits of local governments). 
 

Calculation of the support


The amount of support is calculated based on income tax return of a natural person and the data of received dividends and payments from the owners' equity. The amount of support depends not only on total income, but also on personal income tax liability (both, income tax withheld and additional income tax payable based on the income tax return). This means that a person can receive a refund, but at the same time he or she may have an additional amount of income tax due based on the income tax return. Regarding the additional amount due, the person is sent a tax notice 30 days before the due date. The term for the payment of income tax is 3 July or 2 October. 
 

Support calculation procedure


For example, an employee who has worked full-time throughout the calendar year, and received a salary of 480 euros per month receives 5,760 euros per year as income. If the employee has no other income and deductions from income then the calculation procedure is as follows:

Employee's income 5,760 × coefficient 0.35 = 2,016
Rate of support for the calendar year 2,736 euros (12 × 228)
Possible support per month (2,736 – 2,016) ÷ 12 = 60 euros
Number of months 12
Upper limit of support 58.54 euros per month (income tax withheld from the employee's remuneration of 480 euros), or 702.48 euros per year
Refund 702.48 euros

At the same time, for example, an employee who has worked full-time throughout the calendar year, and received a salary of 650 euros per month receives 7,800 euros per year as income. If the employee has no other income and deductions from income then the calculation procedure is as follows:

Employee's income 7,800 × coefficient 0.35 = 2,730
Possible support per month (2736 – 2730) ÷ 12 = 50 euro cents                                                                    
Number of months 12
Refund 6 euros

Thus, as the gross salary increases to a level above 480 euros per calendar month, the amount of the refund reduces. The potential refund amount is illustrated by the following figure:

The specific amount of refund is identified based on the income tax return of the person.

The upper limit of support is the amount of income tax due, less the income tax refund. Income tax refund may be related to:

  • basic exemption;

  • increased basic exemption upon provision of maintenance to child, pension, compensation for accident at work or occupational disease;

  • housing loan interests;

  • training costs;

  • donations or

  • deduction of premiums of supplementary funded pension.

For example, if 80 euros is to be refunded of the 702 euros of the income tax withheld during the course of one year from a salary of 5,760 euros due to deduction of housing loan interest payments, then the refund amount is 622 euros (702 – 80). Or, for example, if a deduction of training expenses is added to a deduction of housing loan interest payments, due to which fact an income tax of 50 euros is to be refunded, then the amount of the refund is 572 euros (702 – 80 – 50).

A person's total income and income tax due is calculated on an annual basis, but the refund conditions are checked monthly. Therefore, if the conditions were not met in all months during a calendar year, and were only met in some of the months (e.g., six months), then the upper limit of support is divided by 12 and multiplied by the number of months when the conditions were met (for example, 6). Thus the amount of support payable to a person is calculated.
 

Support calculation procedure in case of joint declaration


The amount of support of a spouse depends on the income tax due, as calculated based on the joint income tax return, and the share of the spouse's income therein.

From the income of both spouses, the following deductions are made (Art 37³ (3) of the Labour Market Services and Benefits Act):

  • basic exemption,
  • increased basic exemption in the event of pension,
  • increased basic exemption upon compensation for accident at work or occupational disease,
  • insurance premiums and acquisition of pension fund units,
  • mandatory social security contributions.

After deductions the shares of both spouses' taxable income should be identified.

Calculation of the share of spouses' income is given in the following table:

  Spouse 1  Spouse 2 Total
Taxable income 5,160 11,376 16,536
   wages 5,000 9,065  
   pension 0 1,982  
   sickness benefit 160 329  
Basic exemption 2,040 2,040  
Increased basic exemption in the event of pension 0 1,982  
Increased basic exemption upon compensation for accident at work or occupational disease 0 0  
Mandatory social security contributions 80 326.34  
   unemployment insurance premium 80 145.04  
   contribution to mandatory funded pension 0 181.30  
Income after deductions 3,040
(5,160 – 2,040 – 80 = 3,040)
7,027.66
(11,376 – 2,040 – 1,982 – 145.04 – 181.30 = 7,027.66)
10,067.66
Share of a spouse's income in the joint income 0.30
(3,040 ÷ 10,067.66 = 0.30)
0.70
(7,027.66 ÷ 10,067.66 = 0.70)
 

The amount of support of a spouse depends on the income tax due, as calculated based on the joint income tax return, and the share of the spouse's income therein.

The income tax calculation procedure in the case of joint declaration takes into consideration that the spouses' have two children up to 17 years of age, which means that they are entitled to increased basic exemption in the amount of 1,848 euros.

Based on a joint declaration the income tax is calculated as follows:

Calculation of repayment in case of Spouse 1 (Spouse 2 cannot apply for the support as his/her annual income exceeds 7,817 euros).

Employee's income 5,160 × coefficient 0.35 = 1,806 euros
Rate of support for the calendar year 2,736 euros (12 × 228)
Possible support per month (2,736 – 1,806) ÷ 12 = 77.50 euros
Number of months with conditions met 12
The annual amount of possible support 77.50 × 12 = 930 euros
Upper limit of support Considering the amount of income tax paid by Spouse 1: the amount of income tax, as calculated based on the joint income tax return, considering the share of Spouse 1 in the joint income.
1,643.93 × 0.30 = 493.18 euros
Refund 493.18 euros

 

Restoration of the term for submission of application


The support application shall be submitted to the Estonian Tax and Customs Board by 31 March, with the income tax return of a natural person.

If the application term has been missed for good reason (e.g., sudden illness, unexpected serious illness or death of a person close to the applicant, or any other objective reason), the term may be restored within six months. The Estonian Tax and Customs Board resolves restorations on a case-by-case basis, assesses the facts and the evidence and decides the restoration accordingly.

If the application term has been missed due to circumstances not dependant on the natural person (when the grounds for the submission of the application arose after the term due to the employer's action or inaction, for example, if the employer has declared or entered inaccurate data in the employment register or failed to submit declarations and enter data in the register, or due to other reasons which the natural person could not influence), the term for the submission of the application may be restored without time limitation. In such case one should note that the term can be restored within six months as of the moment the above-mentioned circumstances cease to exist.
 

Payment of support


The Estonian Tax and Customs Board pays the support similar to the payment of income tax rebates to natural persons. The Estonian Tax and Customs Board transfers the support amount into the prepayment account of a natural person, and if the person does not have outstanding liabilities to the state (for example tax arrears, unpaid fines, bailiffs claims), transfers the support into the person's bank account.

If the person has outstanding liabilities, they are offset by the amount of the support.

The Estonian Tax and Customs Board pays the support similar to the payment of income tax rebates by 3 July.
 

Reclamation of support


If it becomes evident that the person was not entitled to receive the support then the Estonian Tax and Customs Board will reclaim the support by making a reasoned decision. Upon reclamation of the support, the employer and the employee are solidarily liable for repayment of the unduly paid support. If incorrect data have been submitted in a tax return or entered in the employment register by the employer (e.g., the employer has paid "under the table"), the employer has failed to submit a tax return or enter data in the employment register, the Estonian Tax and Customs Board has the right to reclaim the unduly paid support from the employer.

The unduly paid support amount can also be paid back to the Estonian Tax and Customs Board in instalments. This concession is due to the fact that the support is paid out to low-income employees who can be temporarily led into a difficult economic situation by a full recovery of the support.

If the employer (company) pays back the support, it is making a payment not related to business, on which amount corporate income tax is imposed (the rate of 20/80) pursuant to Art. 51 (2) clause 5 of the Income Tax Act, as on an expense incurred in order to fulfil obligations not related to the business.
 

Deadlines

Start of November 2016 It is possible to check in the e-Tax Board/e-Customs whether the application conditions (except income condition) for 2016 are met
15 February 2017 The refund applications will be accepted in the e-Tax Board/e-Customs and in service bureaus
31 March 2017 Deadline for submission of refund applications
May 2017 Transfer of the refund into the bank account

 

06.03.2017