Fringe benefits

By its nature, fringe benefit is the income of the recipient (employee), but paying income and social tax on the fringe benefit is the obligation of the person granting the benefit (employer). Fringe benefits i.e. benefits provided by the employer to the employee are subject to income tax at a rate of 20/80 and social tax at a rate of 33%.

Pursuant to subsection 1 of § 48 of the Income Tax Act, employers pay income tax on fringe benefits granted to employees.

Based on clause 7 of subsection 1 of § 2 of the Social Tax Act, social tax is paid on fringe benefits within the meaning of the Income Tax Act, expressed in monetary terms, and on income tax payable on fringe benefits.

Declaration

The period of taxation of fringe benefits is one calendar month. The employer declares the fringe benefits granted to employees and income and social tax calculated on fringe benefits during a calendar month in Annex 4 of the form TSD, which must be submitted together with the form TSD to the Tax and Customs Board by the 10th day of the month following the calendar month in which the fringe benefit was granted. The tax amount is paid to the bank account of the Tax and Customs Board by the same date at the latest.

Handbook - taxation of fringe benefits

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Health and sports expenses

Tax-exempt expenses for improving health are:

  1. participation fees in public sports events
  2. expenses directly related to regular use of sporting or mobility venues
  3. expenses made for maintenance of the employer’s existing sports facilities
  4. expenses made for the services of a rehabilitation therapist, physiotherapist, occupational therapist, clinical speech therapist or clinical psychologist entered in the health administration information system or holding a corresponding professional certificate
  5. insurance premiums of sickness insurance contracts.

An employer can compensate expenses made for improving the employees’ health to the extent of 100 euros per every employee in a quarter exempt from tax.

It must be considered that:

  • 100 euros includes VAT, and input VAT cannot be deducted from the health and sports expenses incurred for employees
  • 100 euros can be used in one day, within one month or three months. It is important that the total tax-exempt expenses in a quarter amount to 100 euros
  • 100 euros is for each employee per quarter and this amount cannot be transferred to other employees or to the following months or quarters, and the tax-exempt expenses of a year cannot be summed up
  • if an employee has several employers, each employer can apply the tax incentive for health and sports expenses in the amount of 100 euros
  • documents are required to compensate the expenses
  • it is necessary to keep person-based accounting (it is possible to choose either cash-based or accrual-based accounting)
  • bearing costs is not mandatory, everything listed does not have to be made available to all employees
  • employees receive benefits because of employment relationships (the contract is concluded in the future, has stopped, is valid or has ended)
  • the tax incentive does not include equipment needed for practising sports (clothes, shoes, table tennis rackets, skis, including rental of sports equipment, etc.) or additional services (e.g. catering, transport, parking, wardrobe costs, reception following an event, etc.)
  • the tax incentive also extends to sports and health expenses made outside Estonia

Employers can decide whether and which services for health improvement or sporting opportunities they offer to their employees. Employees can decide whether and which services for health improvement or sporting opportunities they use.

Example 1

The employer has 10 employees, but two of them want to use the health improvement options. Thus, the employer can bear tax-exempt health improvement costs for two employees, i.e. 200 euros per quarter.

Example 2

The employer has concluded a contract for the use of a sports club in the amount of 500 euros per month (i.e. 1500 euros per quarter). The employer has 20 employees. If 10 of them want to use the sporting opportunities, then the cost of using the sports club is tax-exempt in the amount of 1000 euros (10 × 100), and the cost of using the sports club in the amount of 500 euros (1500 – 1000) is taxed with income and social tax as a fringe benefit. If all 20 employees want to use the sporting opportunities, the cost of using the sports club is tax-exempt in the amount of 2000 euros (20 × 100), and since the employer pays 1500 euros per quarter, there is no tax liability.

The employer can set different thresholds for reimbursement of expenses for employees if the possibility of reimbursement of expenses is ensured for all employees. Establishing a threshold cannot, however, lead to a situation where some employees have no opportunity for reimbursement of expenses. For example, members of the board have a limit of 100 euros per quarter, but the limit for employees is 10 euros per quarter. In this case, it is considered that not all employees have been offered the benefit.

The tax incentive is not intended for employees who work on the basis of short-term (e.g. one-day) authorisation agreements (for example, freelance collaborators of press publications or educational institutions, those who complete study assignments, members of theses defence committees, reviewers, experts, temporary workers, etc. The Income Tax Act allows to make tax-exempt health improvement expenses for them, but not offering them a benefit is not considered a violation of the condition that requires the offer of benefits to all employees.

Last updated: 26.02.2024

Taxable fringe benefits include for example (the list is not final):

  • full or partial covering of housing expenses
  • payment of insurance premiums, unless such obligation is prescribed by law
  • compensation for use of a private automobile in so far as it exceeds the limits established by the Income Tax Act.
    The maximum price of a fringe benefit for the use of an automobile of the employee free of charge or at a preferential price for activities not related to employment or service duties or to the employer's business, if records are maintained, is 0.30 euros per km, but maximum 335 euros per month for each employer.
  • since 2018, the enabling of a use of a vehicle of the employer for activities not related to business. Taxes on fringe benefit are calculated according to engine power (kilowatt price). The special fare for a new passenger car is 1.96 euros per kW per month and passenger car over 5 years of age is 1.47 euros per kW per month.
  • loans given with lower interest than the minimum rate. The price of the fringe benefit shall be calculated as a difference between the interest of the minimum rate and the amount specified as interest according to the loan agreement.
  • transfer free of charge or sale or exchange at a price lower than the market price, of a thing, security, proprietary right or service
  • purchase of a thing, security, proprietary right or service at a price higher than the market price
  • waiver of a monetary claim, unless the estimated reasonable costs of collecting the monetary claim exceed the claimed amount
  • coverage of expenses relating to formal or informal education acquired in the adult education system except for the expenses relating to the employer´s business
  • birthday presents (in spite of the cost)
  • catering provided for the employees free of charge or at a preferential price
  • coverage of expenses for the employees’ clothing unless such obligation is prescribed by law
  • coverage of expenses incurred to transport employees between their residence and their place of employment unless it is impossible to make the journey using public transport with a reasonable expenditure of time and money, or if handicapped employees are unable to use public transport or if use of public transport would cause an essential decrease of the persons' ability to move or work
  • employee´s study loan or interest on it covered by the employer
  • penalties and fines paid for employees by the employer (parking fine)
  • etc.

The following tax exemptions are applicable in relation to persons employed under an employment contract, public servants and members of the management or controlling bodies:

  • coverage of expenses incurred to transport employees between their residence and their place of employment are not classified as fringe benefits if it is impossible to make the journey using public transport with a reasonable expenditure of time and money, or if handicapped employees are unable to use public transport or if use of public transport would cause an essential decrease of the persons' ability to move or work;
  • compensation for the use of a private car upon business trips at the amount maximum 0.30  euros per km, but not exceeding 335 euros per month, if there is a written calculation about the journey, a decision or regulation by the employer, where personal data of the recipient, the amount of compensation and the purpose and date of the journey shall be indicated.
  • The expenses relating to the formal education in connection with an employment or service relationship or with membership of the management or controlling body of a legal person or a permanent establishment of a non-resident legal person.

Amounts of compensations exceeding the limits shall be regarded fringe benefits.

This guideline is to be considered as unofficial and 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 Estonian Tax and Customs Board.

Compensation paid for the use of a personal passenger car (automobile)

Below, we will explain the conditions under which an employer is able to pay a tax-free compensation to an employee for the use of a personal passenger car.

The procedure established in Government of the Republic Regulation No. 164 of 14 July 2006 (hereinafter Regulation) allows compensation to be paid for the use of a passenger car for business trips to:

  • an official (within the meaning of the Income Tax Act, an official is also considered to be a person specified in § 2 (3) of the Civil Service Act, such as a member of a local government council, a member of a rural municipality or city government, a judge, a member of the Riigikogu, etc.);

  • an employee (within the meaning of the Employment Contracts Act); and

  • a member of the management or control body of a legal person (within the meaning of § 9 of the Income Tax Act).

Thus, the owner of a company or a person providing a service by a contract under the law of obligations, cannot be granted a tax-free compensation under this regulation. However, they may be reimbursed for expenses incurred in the interests of a legal person pursuant to § 12 (3) of the Income Tax Act, if these expenses are documented.

Compensation can be paid for the use of a passenger car that is not owned or possessed by the employer. Thus, the passenger car does not have to be in the personal possession of the person using it, however, the right to use the vehicle must be proven. The right of use is fixed either on the vehicle registration certificate or in a power of attorney prepared by the owner of the vehicle. Vehicles of categories M1 and M1G are considered to be passenger cars.

Exceptionally, if the benefit is paid to a disabled person, the costs of using any motor vehicle can be compensated. According to § 2 of the Traffic Act, a motor power-driven vehicle is a vehicle that is powered by an engine. Vehicle is a device powered by a motor or in another power, designated for road traffic or driving on the road.

Payment of the compensation requires a written decision, directive or order of the employer stating the identity of the person receiving the compensation, the amount of the compensation and the date or period during which the reimbursed rides have been made. Copy of the document certifying the right to use the car shall be attached to the written decision. The decision may also be made for a period longer than one calendar month.

It is possible to pay tax-free compensation in case the rides are related to business (work rides) and about the rides are kept records or company has a logbook.

The logbook must contain data on the person using the passenger car, the vehicle’s registration plate data, the initial and final read-out of the odometer for each business ride, the date and purpose of each ride. It is not important whether the logbook is kept on paper or electronically – it must however contain the above-mentioned information. Consequently, the tax-free compensation cannot be paid for future rides, but only for past rides.

If the personal passenger car´s compensation has paid without keeping records (without the logbook), then the payment is considered as wage income, which must be declared by company in a personalised manner on Annex 1 of form TSD (on Annex 2 of form TSD if the recipient of car´s compensation is a non-resident).

The logbook can be used as a basis for compensating business rides in an extent of up to 30 cents per kilometre, but for no more than 335 euros for rides made in one calendar month. This means that the employer may also set a lower price per kilometre, such as 20 cents, but neither threshold may be exceeded in order to qualify for the payment of tax-free compensation. Thereby, if the price per kilometre of compensation is set to be 1 euro, the taxable part is the amount exceeding the price per kilometre, i.e. 70 cents, regardless of the total amount of compensation paid.

Compensation may also be paid to an employee summed up, i.e. more than 335 euros in one calendar month using cash-based principle, however, importantly, compensation per month must not exceed the prescribed monthly limit.

The amount of compensation in excess of the limit is considered to be a fringe benefit. If the amount of the calculated benefit exceeds the limit prescribed for a calendar month, the fringe benefit shall be calculated separately for each month and the fringe benefit shall be declared in the month in which the benefit was paid.

If the records are kept, a natural person may also receive tax-free compensation from several employers, the thereby limit of 335 euros shall then be applied separately for each employer. The compensation includes all expenses related to the normal use of the car (incl. fuel, insurance, etc.), except for parking fees paid while acting as an official, employee, or member of the management or controlling body of a legal person.

The price per kilometre prescribed in the regulation and the tax-free limit are not related to actual expenses (expenses documents). Although § 12 (3) of the Income Tax Act states that any compensation for certified expenses incurred for the benefit of another person shall not be deemed to be income of a natural person, then it is added that, the provisions of this subsection do not apply to compensations for which taxation separate terms, conditions and limits are established. Due to separate terms, conditions and limits having been established for compensation paid for the use of a personal passenger car, then the use of a personal passenger car (e.g. payment for tire change, current repair costs, etc.) is considered to be a fringe benefit (§ 48 of the Income Tax Act and § 6 of Regulation No. 2 of the Minister of Finance "Procedure for Pricing of a Special Discount" of 13 January 2011), except for parking fees paid for using the car related to job tasks official, employees or Member of Board.

Exceptionally, the expenses of a personal passenger car can be reimbursed based on an expense document if the business trip is taken on in a personal car and the reimbursement of these expenses is based on the so-called "business trip regulations": Government of the Republic Regulation No. 110 of 25 June 2009 or Government of the Republic Regulation No. 112 of 19 December 2012.

Generally, rides between the place of work and the residence are not considered as business rides related to business (job rides) and these cannot be reimbursed tax-free, under certain conditions this is however still possible. Rides between the place of work and the residence can be considered to be business rides (job rides), if it is not possible to use public transport to reach the destination within a reasonable time and with a reasonable cost. The same applies, if the residence of the employee working based on an employment contract, is located at least 50 kilometres from the place of work (§ 48 (51) of the Income Tax Act). In those cases, journeys between pleace of work and the residence are indicated thusly in the logbook and these journeys can be reimbursed tax-free in the extent of the general limit (335 euros).

Disabled person can be reimbursed, within the prescribed limits, for rides between residence and place of work, if these rides were kept records (has a logbook) and it is not possible to use public transportation of if the use of public transportation would significantly reduce the person’s ability to move and work.

Rides from home to work and back cannot be reimbursed tax-free due to the reason that it is easier and more convenient for a person to drive between home and work by private passenger car than by using public transportation.

Rides between the place of residence and the place of work can be compensated tax-free, if it is primarily necessary for the employer to perform its activities. This means that the employer’s interest in reimbursing travel between home and work generally prevails and the employer must be able to justify this interest, if necessary. The payment of compensation must be assessed separately for each person, depending on the person’s place of residence, work obligations, start of the working day, possibilities to use public transportation, etc. Having assessed all these factors together, the employer can decide whether or not it is justified to provide tax-free compensation for travel from home to work and back.

Example
An agreement has been concluded with the employee that the employee is ready 24/7 (on-call time) to solve problems arising in the course of business, so-called "crisis situations". Can rides between work and home then be considered as a rides related to business (work rides)?

On-call time is time when the employee is not obligated to perform work duties but is required to be ready to perform work duties, if the employer has given an order under the agreed conditions. As the employee is not able to fully concentrate on rest during on-call time and must be ready to perform work duties immediately, if necessary, then it is justified that the employee is paid 1/10 of the agreed wages for on-call time. On-call time can only be implemented if agreed between the employee and the employer.

Thereby, crisis management (on-call time) is business-related, as are job rides outside the daily place of work and back. In this case, rides between home and work is considered to be work rides. However, it must be borne in mind that imposing a purely formal obligation on employees to deal with crises does not entitle them to tax-free compensation for all rides between work and home. Such an obligation must be substantive, based on real needs of the employer and also correspond to the duties of the employee. 

Resident legal person, state agency or local government agency, sole proprietor and a non-resident with permanent establishment registered in Estonia or a non-resident acting as an employer, who has paid compensation to a natural person for the use of a car during a calendar year (incl. a disabled person) is required by 1 February of the following year (INF 14 will be submitted by 1 February 2021 for the year 2020) to submit declaration INF 14.

To submit form INF 14:

  1. enter the e-MTA
  2. select the section "Reports" and select "INF 14" from the list
  3. on the page listing the declarations, press the button "Add new declaration"
  4. choose "Quarter 4"

Form INF 14 shall declare the amounts compensated, indicating also the part exceeding the prescribed limit.

Examples

The order of the employer states that the employee shall be compensated work rides for the use of a personal passenger car if the employee is keeping a logbook. During the month of January, the employee was reimbursed for the use of a personal passenger car in the total amount of 400 euros (1,333 km x 0.3 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 65 euros (400 – 335) and in form INF 14 – the amount of 400 euros.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks in the amount of 335 euros. No logbook is kept. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
Nothing shall be declared in Annex 4 of form TSD or form INF 14, as no logbook has been kept. The amount of 335 euros is considered the income from employment (wage income) and it shall be declared in Annex 1 of form TSD.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of February, the employee was reimbursed for the use of a personal passenger car in the total amount of 335 euros (744.44 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 111.67 euros (744,44 km × 0.15 euros) and in form INF 14 – the amount of 335 euros.

The order of the employer states that the employee shall be compensated for the use of a personal passenger car while performing work tasks and keeping a logbook. During the month of March, the employee was reimbursed for the use of a personal passenger car in the total amount of 675 euros (1,500 km × 0.45 euros) and the same amount was transferred to the employee. What amount must be declared in Annex 4 of form TSD and what amount in form INF 14?
In Annex 4 of form TSD shall be declared the amount of 340 euros (675 – 335) and in form INF 14 – the amount of 675 euros.

Last updated: 18.03.2024

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