All types of employments paid for performing work are part of income from employment and subject to income tax, including
- remuneration, holiday pay, compensation prescribed in the case of cancellation of the employment contract or release from service, compensation or fines for delay ordered by a court or a labour dispute committee, sickness benefit and holiday pay compensated from the state budget,
- income tax is charged on compensation for health damage caused by an accident at work or an occupational disease unless such compensation is paid as insurance indemnity.
The employer declares (on Form TSD) and pays all labour taxes on income from employment. Individuals have income from employment data reported by employers in Part I of Table 5.1 of their pre-completed individual income tax return.
You are under the obligation to verify the correctness of the data reported by the employer and amend and supplement such data where necessary. If you have received any income that is not included in the pre-completed income tax return, you must report such income in Part II of Table 5.1.
Different types of income from employment
Individual income tax applies to income regardless of the individual's age following general principles. If work was performed by a child then the employer declares (on Form TSD) the child’s remuneration and pays all labour taxes thereon. That will occur even if the child’s income from employment in a calendar month is less than the general basic exemption of 500 euros.
In order to apply the general basic exemption it is necessary to submit an application for basic exemption to the employer. If a child submits an application for basic exemption to the employer and his or her income from employment is below 500 euros then no income tax will be withheld thereon. If a child does not submit such application, the employer will withhold income tax but the child will be able to claim back the excess income tax paid on the basis of an individual income tax return.
The increased basic exemption applied in the tax returns of parents to children of up to 17 years of age (1,848 euros for the second child and 3,048 euros starting from the third child) is reduced by the child’s income from employment.
On the basis of data reported by the employer the child’s personal information and the child’s income from employment are pre-completed in the parent’s income tax return and this reduces the increased basic exemption of the parent. If a child has received income from employment that is not reported in the pre-completed data then the parent must declare such income.
Clients of private house construction who are natural persons (hereinafter client) and builders typically enter into a contract for services, authorisation agreement or contract under the law of obligations to agree on the scope of work, conditions, terms, payment and guarantee. The existence of a contract serves as a guarantee to the client for due performance of work and a basis for rectification of defects and breaches. The entry into contract is preceded by a quotation submitted by the builder.
The obligation to pay taxes depends on whether the natural person who is the client commissions the house construction work from a company, sole proprietor or a builder who has no business registration.
- If the builder is a company
When construction work is commissioned from companies then clients who are natural persons have no tax obligations to the state. Taxes due on all salary payouts made to employees are paid by the employer or the company. If the company is registered for value-added tax it has an additional obligation to file value-added tax returns and pay value-added tax on the sale of goods and services. This means that when a company registered for value-added tax issues an invoice to a client who is a natural person the client must pay the value-added tax shown on the invoice to the company and this company pays such value-added tax to the state - the client bears the cost of the value-added tax expense but is not the one who pays it to the state.
If the company wants to transact in cash and the final contract price is lower by the value-added tax amount then there is a quite high risk that the supply will not be declared in value-added tax returns by the company and payouts of remuneration to employees are not reported in income and social tax returns (hereinafter TSD). Therefore, in case of cash settlement there is a risk that the company fails to pay taxes to the state.
- If the builder is a sole proprietor (FIE)
Pursuant to § 14 of the Income Tax Act, a such activity by sole proprietor builders is deemed the person’s independent economic or professional activity, the aim of which is to derive income and fees paid for the work or services is deemed such person’s business income that a builder who is a natural person must independently declare.
Such income is subject to income tax and social tax and if the builder is registered for value-added tax then also value-added tax on the sale of goods and services. If the sole proprietor wants to transact in cash then a rather high risk exists that such business income is not declared by the sole proprietor and the state will not be paid taxes.
- If the builder is a natural person
If the builder’s activity does not correspond to the characteristics of business activity as stipulated in § 14 (2) of the Income Tax Act (person’s independent economic or professional activity, the aim of which is to derive income), then
- the client must register such employment by a natural person in the employment register;
- in case of an employment contract, the client must declare and pay all taxes and charges on salary payouts;
- in case of a contract for services, authorisation agreement or any other contract under the law of obligations, the builder must declare and pay income tax on the income from employment or services reported in his or her income tax return and the client must declare and pay social tax and charges (unemployment insurance premiums and mandatory funded pension contributions if the builder is an obligated person).
Tax audits of Estonian resident long distance lorry drivers and ship crew members working abroad have revealed that income has remained untaxed in Estonia due to misunderstandings. Below, we explain the filing and taxation obligations applicable to such income, which also applies to non-resident long distance lorry drivers.
The concept of residency is important in the application of income tax. Pursuant to § 6 (1) of the Income Tax Act, a natural person is a resident (a person subject to unlimited tax liability) in the following cases:
- his or her place of residence is Estonia or
- he or she stays in Estonia for at least 183 days over the course of a period of 12 consecutive calendar months.
Meeting just one of the aforementioned criteria is sufficient for a person to be deemed resident.
If the place of residence of a long distance lorry driver or ship crew member is in Estonia, he or she is a resident regardless of the fact that he or she spends a lot of time outside of Estonia and he or she will incur an obligation to pay income tax in Estonia on his or her entire income earned worldwide, including income from employment paid by a foreign employer (basis: Income Tax Act, § 12 (1)). Income from employment received for working in a foreign state is not subject to taxation in Estonia only in the event that the person has stayed in the foreign state for the purpose of employment for at least 183 days over the course of a period of 12 consecutive calendar months and the specified income has been the taxable income of the person in the foreign state (basis: Income Tax Act, § 13 (4)). Income from employment of long distance lorry drivers and ship crew members, however, is generally not income taxable in a foreign state.
Estonia has entered into bilateral treaties with many countries for the avoidance of double taxation and the prevention of fiscal evasion (hereinafter: tax treaty). In such tax treaties the countries have agreed between themselves as to which income is subject to taxation by each country to which extent. Even though the tax treaties entered into with various countries may contain differences, generally pursuant to article 15 of a tax treaty concerning the taxation of income from employment the state where the employer is based has the right to tax an Estonian resident’s income from employment only if work has been performed in such foreign state.
Long distance lorry drivers generally do not stay for an extended period in a country where their employer is based and therefore due to the tax treaty a foreign employer’s state cannot tax the income from employment of long distance lorry drivers. Thus, such income is taxed pursuant to the Income Tax Act of Estonia both in Estonia and in the country of residency.
Mandatory social security payments can be deducted from the taxable income, these are noted in table 9.7 of the income tax return (basis: Income Tax Act, § 281).
A tax treaty may contain a special provision on the application of income tax to the income from employment of ship crew members whereby such income from employment may be taxed by the state of the ship operating company or also the state of the employer, regardless of where the work was performed. Therefore, in the case of ship crew members each specific case should be guided by the tax treaty in place with that particular state.
The best proof a long distance lorry driver or ship crew member can submit that income from employment derived from a foreign state has been taxed abroad is a certificate from a foreign tax authority. Generally, an employer’s certificate with 0 noted as income tax is insufficient but then it is unclear if the income has been taxed and there has been no need to pay income tax due to deductions or income has not been declared to the tax authority of the foreign state.
In case of foreign employers the difference in the declaration of income is that during the year no income tax has been withheld and it must be paid by yourself based on an income tax return filed annually.
Non-resident long distance lorry drivers
Income from employment of non-resident long distance lorry drivers employed by an Estonian resident company is not subject to income tax in Estonia if he or she performs duties outside of Estonia. There is no grounds for application of income tax in the Income Tax Act and tax treaties that Estonia has entered into also state that Estonia cannot tax the income from employment of an employee who is resident of another state if such work is not performed in Estonia.
Therefore, if a long distance lorry driver is driving outside of Estonia, an Estonian resident employer does not withhold income tax on payments in Estonia. A non-resident recipient declares the income from employment received by themselves in the state where he or she is resident.
A ship crew member who is a resident of Estonia or a Contracting Party to the European Economic Area whose employer is an Estonian company or a foreign company doing business in Estonia as an employer must report his or her income from employment in the new table 7.3 of the income tax return for a resident natural person (Table 7.3 has been pre-completed on the basis of Annexes 1 and 2 to Form TSD 7.3).
Income from employment is included in the accounting of annual income but the rate of income tax is 0% and therefore individuals cannot make deductions from such income.
Ship crew members who are Estonian residents and whose employer is a foreign company and
- who is working in a foreign state but on a ship that meets the conditions reports his or her income from employment in the new table 7.3 of the income tax return at the income tax rate of 0%. Income from employment is included in the accounting of annual income but the rate of income tax is 0% and therefore individuals cannot make deductions from such income. An individual must also indicate the IMO number of the ship in the income tax return, which will be used by Estonian Tax and Customs Board to confirm with the Transport Administration if the ship meets the conditions necessary for use of the special scheme.
- who is working in a foreign state but on another ship reports his or her income from employment under the normal procedure in table 8.1 or 8.8 of the income tax return. Income from employment is included in the accounting of annual income and deductions can be made from such income.
Individuals who receive remuneration from European Communities as officials and who pay tax for the benefit of the European Communities are exempt from income tax in Estonia with respect to such income and do not declare it in Estonia.
Who is under the obligation to declare
Estonian resident natural persons are not obligated to declare in the Estonian income tax return for a resident natural person such remuneration, daily allowance and benefits they received as officials from the European Communities that are exempted from income tax in Estonia pursuant to the Protocol (Judgment of the Court of Justice of the European Union dated 5 July 2012 No. c-558/10).
Remuneration paid to experts (who are not officials) that is not subject to tax for the benefit of the European Communities is not exempt from income tax in Estonia for natural persons who are resident in Estonia and expert remuneration received must be declared in Estonia.
Tax exemption of officials of the European Communities
Tax for the benefit of the European Communities is a withholding tax that pursuant to Article 13 of the Protocol on the Privileges and Immunities of the European Communities of 1965 is applicable to officials and other servants of the European Communities on their salaries and other remuneration received from the Community.
The Protocol determines the group of servants who are exempt from payment of national income tax on remuneration paid by the Community and on allowances on termination of service, as well as the recipients of Community invalidity pension, retirement pension and survivor’s pension.
The amendment to clause 5 of subsection 1 of § 5 of the Employment Contracts Act provides that, as of 1 August 2022, the written document of the employment contract must contain
- taxes and payments payable and withheld by the employer,
- including a reference to the institutions receiving taxes and payments and the protection resulting from the payment thereof.
Therefore, the employer is obligated to inform the employee of the taxes and payments payable and withheld on wages and of the protection that come with the payment of them.
The employer declares and pays on the employee's wages:
- income tax 20%
- social tax 33%
- unemployment insurance premium
(employee rate 1.6% and employer rate 0.8%)
- contribution to funded pension
(2% for a person who has joined the second pillar)
The employer must also inform the employee of the taxes or payments and the protection related to the payment thereof which are not mandatory by law. For example, if the employee and the employer have agreed that the employer will pay contributions to supplementary funded pension (III pillar), insurance premiums under a health insurance contract or unemployment and occupational disease insurance contract, the employer is obliged to inform the employee also of the institutions/companies receiving these contributions and the protection accompanying such contributions.
Reference to institutions receiving taxes and payments and the protection related to the payment thereof
Information on taxes and payments may be submitted in the form of a reference, for example, referring to the Income Tax Act (subsection 1 of § 5, subsection 4 of § 40), Unemployment Insurance Act (§ 6, § 36, clause 3 of subsection 1 of § 42), Funded Pensions Act (subsection 2 of § 2, clause 4 of subsection 1 of § 11), and Social Tax Act (§ 1, clause 4 of subsection 1 of § 9).
Instead of a reference, the employer can also inform the employee of the data on taxes and payments using illustrative information, for example, by providing the employee with the information described in a table in the written document:
|Tax or payment||Institution receiving tax or payment||Protection accompanying tax or payment|
|Income tax||Tax and Customs Board||Income tax is used to finance the activities of state agencies and local government authorities.|
|Unemployment insurance premium||Unemployment insurance premium is used to finance unemployment insurance, which provides protection for employees in the event of unemployment (benefits, allowances and services).|
|Contribution to mandatory funded pension||Contribution to mandatory funded pension is used to finance II pillar pension.|
|Social tax||Social tax is used to finance health insurance and I and II pillar pensions|
Last updated: 27.05.2022