Business means independent economic or professional activities of a person (including the professional activity of a notary and bailiff and the creative activity of a creative person), the aim of which is to receive income from the production, sale or intermediation of goods, provision of services or other activities, including creative or scientific activity.
- Income derived from business is declared on form E.
- Form E is submitted together with Form A of the income tax return of a natural person by 30 April of the year following the period of taxation (calendar year).
- Sole proprietors are required to submit an income tax return even if they did not receive any business income at all or if the income was smaller than the basic exemption.
- Both Form A and Form E can be submitted either through e-MTA or on paper.
- Submission of income tax return through the e-MTA is possible from 15 February. Form E is not pre-completed.
- The income tax return of business income (Form E) must also be submitted by the persons who are not entered in the commercial register but who have been engaged in business and derived business income during a year.
- Business expenses and business income are taken into account in the year when the income is received or the expenses are made.
A sole proprietor delivered goods to a purchaser and in October the sole proprietor submitted an invoice in the amount of 500 euros. The sole proprietor received money for the delivered goods next year in January. The amount of 500 euros is deemed the sole proprietor's income of the next year and it is not taken into account in the declaration of income in the current year.
- If an enterprise is transferred to a person who continues the activities of a sole proprietor, the transferor shall submit an annex to Form E together with Form A and Form E by 30 April of the year following the period of taxation.
- The income tax return Form E must be completed on the cash basis accounting, i.e. if a sole proprietor has used an accrual method of accounting, he or she is required to adjust it to the cash accounting.
On Form E, income and expenses are entered inclusive of the value added tax.
Business income and expenses are taken into account in the year when the income was received or expenses were made (paid).
Amounts indicated on Form must comply with the amounts entered in the accounting. When submitting Form E, the annual accounting must be organised and final.
- According to the Income Tax Act, income from a commercial or residential lease may be declared either on Form A or Form E. Income from a commercial or residential lease is declared on Form E if the taxpayer is registered as a sole proprietor and the income from rent is his or her business income. If business expenses are indicated on Form E, income must be also declared on Form E.
If the income from rent is not business income and income tax on this was withheld, it is declared in Part I of Table 5.4 of Form A.
If the income from rent is not business income and the income tax was not withheld, it is declared in Part II of Table 5.4 of Form A.
- Transfer of self-manufactured agricultural products
If the transfer of self-manufactured agricultural products (sale, exchange) is a sole proprietor’s line of business, he or she has to declare the income received on line 2 of Form E. If the sole proprietor provides other services as well (e.g. clears the local roads from snow with the tractor), it cannot be declared as the transfer of self-manufactured agricultural products, and it must be declared as the provision of services on line 1 of Form E.
- Transfer of timber and the right to cut the standing crop
If a sole proprietor has transferred timber (felled trees and stems, parts of stems after cross-cutting the stems, logging waste) or the right to cut the standing crop from his or her immovable, he or she has to declare the received income on line 3 of form E.
Upon the transfer of timber and the right to cut the standing crop or in the case of related subsidies, the registered immovable number of that plot of land has to be declared as well.
- Income from the transfer of securities is not taxed as business income but as gains from the transfer of securities. Such income must be declared on Form A either in Table 6.1 or 8.2.
- Financial benefits and scholarships or grants received in connection with business (including the scholarships and grants received from the state budget or by law and the benefits received by law) must be declared as business income. Expenses incurred in connection with business may be deducted from the business income, benefits, scholarships and grants.
- Income from business abroad
When receiving business income abroad, Table 1 of Form E must be completed. Accounting must be broken down by countries and by types of income.
In the same table, it is also required to enter the expenses made for receiving business income from abroad, and in respective lines of the basic table of Form E it is necessary to indicate the net amount of income derived abroad.
Sole proprietors cannot enter the expenses made for receiving business income abroad in the basic table of Form E.
- Sole proprietors registered in the commercial register, notaries and bailiffs can deduct the expenses incurred in relation to business from their business income.
- All certified expenses incurred in relation to business can be deducted from business income as long as the connection of such expenses with business is clearly justified. If the expenses incurred are only partly related to business, only the proportion of expenses related to business may be deducted. Expenses are related to business if they have been made for deriving business income subject to taxation or the expenses are necessary or appropriate for maintaining or developing such business.
Additional deductions from the income derived from the sale of agricultural products, timber and the right to cut the standing crop as well as Natura 2000 support for private forestland
After the allowed deductions, a sole proprietor may additionally deduct up to 2877 euros a year from his or her income received from the transfer of unprocessed self-produced agricultural products (line 2.4 of Form E).
Besides, the owners of registered immovable covered with forest who are entered in the commercial register as sole proprietors, may additionally deduct up to 5000 euros from the income derived from the sale of timber, the right to cut the standing crop and the Natura 2000 support for private forestland (line 3.4 of Form E).
Increased basic exemption may be taken into account within the range of a particular type of income. If a person is engaged in different lines of business, e.g. the sale of timber and the right to cut the standing crop and the sale of agricultural products, he or she has to keep separate accounts of income and expenses broken down by these types of income.
If the net income received from the sale of timber and the right to cut the standing crop is smaller than the maximum amount of the additional deduction (5000 euros), for example 1500 euros, the part that has not been deducted from the income (3500 euros) cannot be taken into account in reduction in the yield of the agricultural income.
The sale of processed timber (e.g. chopped firewood) is not considered the transfer of timber from which additional deductions (5000 euros) can be made. Such income is declared in Part I of Form E.
Private persons have the opportunity to open an entrepreneur account at LHV Pank and fulfil their tax liability according to the Simplified Business Income Taxation Act.
The entrepreneur account is intended to simplify the fulfilment of tax liability for the payments received for the provision of services from one private person to another private person or for the sale of goods to a private or legal person.
Money earned from the provision of services or sales of goods during the period when the owner of the entrepreneur account is entitled to social security in another European Economic Area country (European Union Member States, Norway, Liechtenstein, Switzerland) or in the State of the Social Security Agreement (Canada, Ukraine, Australia, Belarus), where such income is subject to social security charges, may not be transferred to the entrepreneur account.
A person who has opened an entrepreneur account does not have to register as an entrepreneur or keep accounts of income and expenses. The owner of the entrepreneur account cannot be a VAT payer or be acting as a sole proprietor in the same or similar area of activity.
An entrepreneur account owner can view all the received payments and tax accounting in the e-MTA (Registers and inquiries – My inquiries – Entrepreneur account).
You can check whether a person has an entrepreneur account through Search of entrepreneur account.
Overview of the entrepreneur account
The entrepreneur account creates a new simple and affordable way of doing business. Accounting and tax reports are not required when using the entrepreneur account because the tax liability is calculated on the basis of the payments to the entrepreneur account. An entrepreneur account owner does not issue invoices because he or she is not a person who is required to keep accounts. An entrepreneur account owner can provide services or sell goods by a verbal contract. However, if necessary, he or she can also conclude a simple written contract containing relevant data on providing the service or selling the goods. A bank account statement, a payment terminal receipt or a cash receipt may also serve as a written contract.
For example, a bank account statement (payment order) or a cash out record form indicating the name, quantity, price and amount of the goods or services is a perfectly suitable expense document for a legal person when making a transfer to the entrepreneur account.
LHV Bank also provides payment terminals to entrepreneur account holders (on payment by card). The payment terminal issues a receipt for the goods, on which you can write the name of the goods and as such, it is a perfectly appropriate expense document.
Furthermore, if, for example, an entrepreneur account owner sells self-produced handicraft to a legal person at a fair or marketplace, a cash in record form containing the date, details of the seller and buyer, the name, quantity and price of the goods can serve as an expense document suitable for the legal person. If an entrepreneur account owner receives cash when providing a service or selling goods, he or she will transfer the money to his or her entrepreneur account to fulfill his or her tax liability.
Since in the case of legal persons the documentation of business transactions and the flow and keeping of source documents are governed by the accounting policies and procedures, the requirements may differ, but the Estonian Tax and Customs Board accepts simplified documents in the case of the entrepreneur account.
Who benefit from the entrepreneur account
The entrepreneur account is useful for a person who provides services to other private persons in the areas of activity that do not involve any direct expenses, or who sells self-produced goods with low costs of materials or acquisition to private persons and legal persons.
Such services can be baby-sitting, housekeeping, gardening, repair or construction services that do not involve direct costs or in which case a customer pays for the costs. For example, a customer orders repair or construction services and buys the necessary tools and materials himself or herself.
Another example is the sale of self-produced goods to private and legal persons if the cost of raw material or source material is low compared to the selling price of the goods. Such a case could be the sale of handicraft and art or the sale of food, plants etc. grown or produced by a private person.
The entrepreneur account is also an appropriate solution for the new forms of entrepreneurship, allowing for the simplified taxation of fees paid by one private person to another through the ride-sharing service platforms like Uber, Taxify, Bolt, etc.
Who do not benefit from the entrepreneur account
Since the total amount received into the entrepreneur account (not only the profit from the provision of services or the sale of goods) is taxed with business income tax, it is not possible to deduct costs or expenses. Therefore, in the areas of activity that involve direct or high costs, it is more beneficial to operate as a sole proprietor or through a private limited company. For example, when selling or distributing goods, it is important to deduct the acquisition costs of the goods from the income.
A private person opens an entrepreneur account at LHV Pank.
- To conclude the entrepreneur account agreement, the person must already be a customer of LHV Pank.
- The customer of LHV Pank enters the LHV internet bank. From the section ‘Information and Settings’, the customer selects the page ‘Agreements’ and on the row ‘Entrepreneur account’ clicks ‘Sign agreement’. The agreement can be signed with Smart-ID, Mobile-ID or an ID card. It is important to review the terms and conditions of the entrepreneur account before signing the agreement!
- By signing the agreement, the owner of the entrepreneur account gives the bank an order to reserve business income tax from the total amounts received into the entrepreneur account and to transfer the business income tax to the Estonian Tax and Customs Board.
LHV Pank informs the Estonian Tax and Customs Board of the details of the person who has opened or closed the entrepreneur account and of the number of the entrepreneur account (IBAN), and immediately transfers the business income tax reserved from the total amounts received into the account within a calendar month to the Estonian Tax and Customs Board. The account owner can use free money in the entrepreneur account in the same way as he or she uses the funds in his or her current account.
The Estonian Tax and Customs Board
- transfers the taxpayer's data received from LHV Pank upon the conclusion of the agreement of opening the entrepreneur account into the register of taxable persons and deletes the taxpayer's data from the register upon the termination of the entrepreneur account agreement;
- if the taxpayer is an obligated person required to make contributions to mandatory funded pension, divides the received business income tax as follows:
- income tax rate of 20/55 of the business income tax rate
- social tax rate of 33/55 of the business income tax rate
- mandatory funded pension contribution rate of 2/55 of the business income tax rate;
- if the taxpayer is not an obligated person required to make contributions to mandatory funded pension, divides the received business income tax as follows:
- income tax rate of 20/53 of the business income tax rate
- social tax rate of 33/55 of the business income tax rate;
- forwards the data of the mandatory funded pension contribution to the registrar of the pension register and the social tax data to the Estonian Health Insurance Fund and the Estonian Social Insurance Board.
The business income tax rate is 20% of the total amount received into the entrepreneur account if the amount does not exceed 25 000 euros per calendar year, and 40% of the amount exceeding 25 000 euros received into the entrepreneur account per calendar year.
If the amount received into the entrepreneur account exceeds 40 000 euros per calendar year, the natural person is obligated to register as an entrepreneur (sole proprietor, private limited company) with the commercial register and as a person liable to value added tax with the Estonian Tax and Customs Board. The registered entrepreneur is required to keep accounts records as well as accounts for tax purposes.
The holder of entrepreneur account is entitled to health insurance if the part of social tax received in a calendar month is at least within the minimum obligation of social tax. In 2021, the monthly rate underlying the minimum social tax obligation is 584 euros, and the minimum social tax liability is 192.72 euros per month (584 × 33%).
In order to be eligible for health insurance, at least the amount of minimum social tax for the previous calendar month has to be received for the natural person. Health insurance begins on the following day after the receipt of social tax (10th date) and stops after one month if the minimum social tax obligation is not fulfilled by the due date. The Estonian Tax and Customs Board submits the details of the person for whom the minimum social tax liability has been received to the Estonian Health Insurance Fund.
If a person is operating only through an entrepreneur account and has joined the second pension pillar, he or she must receive in 2021 at least 1606 euros per calendar month for the provision of services or for the sale of goods, from which the business income tax is 321.20 euros (1606 × 20%) and of which social tax is 192.72 euros (321.20 × 33/55 for an obligated person required to make contributions to a mandatory funded pension). If the minimum social tax obligation is fulfilled, the person has the right to receive the health insurance benefits.
If a person is operating only through an entrepreneur account and has not joined the second pension pillar, he or she must receive at least 1548 euros per calendar month from the provision of services or sale of goods in 2021 in order to have health insurance. Of the 1548 euros, business income tax constitutes 309.60 euros (1548 × 20%) and social tax 192.72 euros (309.60 × 33/53). If the minimum social tax obligation is fulfilled, the person has the right to receive health insurance benefits.
More information about the health insurance can be found on the Estonian Health Insurance Fund's webpage Working adults.
In February 2021, a natural person earned 400 euros under a service agreement concluded with a legal person, and the legal person paid social tax on the remuneration, which is 132 euros (400 × 33%). In February, the natural person also received 800 euros into the entrepreneur account, from which the business income tax was 160 euros (800 x 20%) and social tax was 96 euros (160 × 33/55).
Thus, in February a total of 228 euros (132 + 96) of social tax was collected from the natural person. In this case, the natural person´s minimum social tax obligation is fulfilled in February and he is eligible for health insurance from 11 March.
No, you are not allowed to make deductions in a natural person's income tax return from the income received into the entrepreneur account (for example, tax-exempt income, mortgage interests, training costs). In addition, the income tax part of the business income tax is not considered as paid or withheld income tax in the income tax return of a natural person.
At the same time, it is important to take into account that the sums received into the entrepreneur account, from which the part of social tax has been deducted, are taken into account as the annual income of the natural person, which has an impact on the amount of the basic exemption of the natural person. The annual income and basic exemption are explained in more detail in the instruction Calculation of basic exemption.
An entrepreneur account owner can provide services and sell goods to private persons, companies, non-profit associations, foundations, legal persons governed by public law, state and local government authorities and other persons.
When providing a service to a resident company, non-profit association, foundation and religious association that is a legal person, it is necessary to take into account the fact that these persons will be subject to additional income tax (rate 20/80), which equates the tax burden with the tax burden of a regular employment relationship. The additional tax liability is intended to prevent shifting the regular employment relationship to a more favourable entrepreneur account.
Therefore, if the service fee is transferred to the entrepreneur account, it must be assessed who has received the service provided by the entrepreneur account holder – whether the employer (company) or the employee, and whether it may be the compensation of the expenses by the employer to the employee. Likewise, it must be assessed whether it may be the case of replacing the employer's employment contract or service contract by the use of an entrepreneur account.
If an employee has received the service and the employer compensates the employee for the expenses related to the work tasks, it is exempt from tax under subsection 12 (3) of the Income Tax Act. For example, in a situation where the employee used the Bolt taxi service and the employer compensated the employee for the travel expenses related to work tasks, this is a compensation of expenses exempt from tax. Even in a situation where the taxi transport service provider was the owner of an entrepreneur account, compensation for the cost of taxi service does not entail any additional tax liability to the employer (company) pursuant to clause 34 13) and clause 51 (2) 1) of the Income Tax Act.
However, if the employer replaces the employment contract or the service contract by the use of an entrepreneur account, the company will incur an additional tax liability under the above-mentioned provisions. For example, in a situation where the company replaces the remuneration of a driver who has so far worked under an employment contract by the use of an entrepreneur account.
Thus, the company incurs an additional income tax liability (20/80) in a situation where the entrepreneur account replaces an employment contract, authorisation agreement, a contract for services or another service contract under the Law of Obligations Act.
There is no additional income tax in the case of the sale of goods.
Therefore, if a private person receives remuneration for providing services into the entrepreneur account from a resident company, non-profit association, foundation or religious association which is a legal person (hereinafter also ‘a payer’) and the remuneration is subject to taxation on the basis of the Simplified Business Income Taxation Act, the person will be subject to additional income tax (rate 20/80) on the expenses that are not related to business (clause 34 13)) and subsections 51 (1)–(3)) of the Income Tax Act.
The entrepreneur account owner is obligated to inform the payer of the fact that he or she provides the service through an entrepreneur account and the service is taxable under the Simplified Business Income Taxation Act. Based on this information, the payer knows that it is obligated to declare the paid amount in Annex 6 to Form TSD under code 6080. It is required to pay income tax on expenses not related to business (rate 20/80).
If the entrepreneur account owner does not report that he or she is providing the service through an entrepreneur account, the payer is obligated to tax the payment made to a natural person for the service with all labour taxes.
State and local government authorities, legal persons governed by public law and non-resident companies are not subject to tax liability pursuant to clause 51 (2) p 1) of the Income Tax Act.
For the purpose of LHV Pank, the entrepreneur account is a current account to which the simplified rules for the taxation of business income apply. Similar rules apply to the entrepreneur account and current account. For example, a bank card or a card payment terminal can be ordered for the entrepreneur account. Investment services are an exception – securities transactions are not allowed in the entrepreneur account.
For private persons, we recommend using the current account for daily operations that are not related to the entrepreneur account to avoid erroneous tax payments to the Estonian Tax and Customs Board.
If a payment was mistakenly received into the entrepreneur account and it was taxed with business income tax, the taxpayer should submit an application through the e-MTA (Communication – Correspondence – Inquiries, certificates, applications or Claims, liabilities, accounting) with the details proving that the amount received was not subject to business income tax.
If necessary, the application together with the evidence can also be submitted to the Estonian Tax and Customs Board in writing.
The Estonian Tax and Customs Board will return the mistakenly paid tax to the taxpayer.
Last updated: 28.09.2021