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.
From January 2025, the minimum hourly wage is 5,31 euros and in case of full-time work the minimum monthly wage is 886 euros.
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The employer declares and pays all labour taxes on employment income, i.e. withholds income tax, the employee's unemployment insurance premiums, and, in the case of an obligated person, the funded pension contributions, and pays the employer’s unemployment insurance premiums and social tax. The payment of employment income is declared with payment type 10 in annex 1 of the tax declaration form TSD. The data on employment income declared by the employer is pre-filled in part I of table 5.1 of the person’s income tax return, and deductions of the unemployment insurance premiums and funded pension contribution in table 9.1.
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
In the case of teleworking (or remote work), the employee performs their daily work tasks outside the location country of the employer and based on an agreement made in a reproducible form between the employer and the employee.
If there is no such agreement, then it is difficult to prove the actual situation when determining tax liabilities and there may be a conflict between the data declared by the employer and the employee, or the data declared and the actual situation. And in such a case, if, for example, taxes have been declared and paid in the wrong country, the country where the declaration was supposed to take place can use coercive measures allowed in its legislation (interest, fine, etc.) for not paying taxes.
In the case of teleworking, it is necessary to collect evidence that the work takes place in another country to avoid later confusions, because evidence is very important in determining the country of tax liability. In addition to the agreement between the employer and the employee, a tax residence certificate approved by the tax office of the employee's home country, confirmation of the address of the registered residence, evidence of the family's location, evidence of educational institutions of children, etc., may also be necessary.
If previously the employer and the employee were in the same country, but the country of the place of employment changes due to teleworking, then depending on the person's place of residence and the period of stay in another country, the country where taxes are paid on salaries, wages, and fringe benefits (hereinafter remuneration) changes. The employer and the employee are obliged to fulfil the obligations of registration, declaration and payment of taxes related to the taxation of remuneration in a foreign country even if the employer is still in Estonia, but the employee is located in the foreign country while working.
The way of fulfilling tax liabilities depends on each country's own rules, so the employer and employee must make the rules of procedures for registration, declaration, and payment of taxes in force in the country where the work is performed clear for themselves. It would be good to do this before the start of the activity to avoid later inconveniences, such as tax interest or fines. In case of questions, it is important to contact the tax authority of the country where the work is performed, because the Estonian Tax and Customs Board is not competent to advise on foreign tax obligations.
NB! No different rules from the usual taxation with income tax have been laid down for the taxation of remuneration received for teleworking. Standard international income tax rules apply.
If teleworking is done in a country different from the employer's country, it is important to find out in which country the remuneration is taxed, because these rules depend on several circumstances at once:
- the place of work (in which country the employee is located) and
- the employee's tax residency (permanent residence) and
- the employer's country of residence or permanent establishment in the country where the work is performed
Only one criterion is not enough to decide in which country to pay income tax.
To avoid double taxation of remuneration, the rules of bilateral income tax avoidance agreements (tax treaties) concluded between Estonia and the foreign country must be followed, where, in addition to remuneration, there are also exceptions for government work or research remuneration, performance fees for athletes or entertainers, and for employees of international sea or air transport. The rules in this article also do not apply to the remuneration of members of companies’ governing bodies (council or board). You can read more about the exceptions on the page “Taxation of non-resident’s Estonian income”.
The country of income tax liability of remuneration depends primarily on the country in which the work is done. Therefore, it is not enough to know only the employer's country. The country where a person lives taxes all the person's income, but ensures the avoidance of double taxation of remuneration, taking into account the income tax liability of the country where the work is performed.
If a person works while staying in Estonia and works for an Estonian employer or a non-resident’s permanent establishment located in Estonia, income tax liability on remuneration arises in Estonia. Even in the case of a short-term business trip of an Estonian resident employee to a foreign country where the Estonian employer does not have a permanent establishment or head office, the income tax liability on the remuneration remains in Estonia and no income tax liability arises in the foreign country.
If a person works for an Estonian employer while staying in a foreign country
Foreign income tax applies to remuneration due to the employee's stay in the foreign country. In the case of a short-term business trip from abroad to Estonia, where the employer is a resident, income tax liability arises on remuneration from the first day of stay in Estonia (regardless of the number of days of stay).
If a person works for a foreign employer while staying in Estonia
Estonian income tax applies to remuneration. Although the employer is from a foreign country, income tax liability of the foreign country does not arise on remuneration if the person is not in the foreign country while working. Only in the case of a short-term business trip of a non-resident employee from a foreign country to Estonia, where the foreign employer does not have a permanent establishment in Estonia, the income tax liability remains in the foreign country and no income tax liability arises in Estonia.
If the employee often travels from their home country to the country where they stay while working, income tax liability arises in both countries: the country of work and the home country. In the country where the work is performed, the remuneration received for the time spent in that country is subject to income tax. A person’s worldwide income is declared and taxed in their home country. Double taxation with income tax is avoided in the resident country based on proof of payment of foreign income tax. Depending on the circumstances and whether the countries have concluded an agreement for the avoidance of double taxation with income tax, the rules for taxation with income tax may differ from what is written here. There are no special rules for the taxation of teleworking, the usual international rules for taxation with income tax apply.
If a employee's country of employment changes, the employee's tax residency will likely change as well. For example, whether a person declares their entire worldwide income in a country compared to the income received only from that country also depends on tax residency, and which declaration forms to use and how to calculate taxes. An employee who, instead of Estonia, goes to work remotely in a foreign country, is no longer a resident of Estonia if they normally work in the foreign country and therefore live there permanently. If the place of residence also remains in Estonia because the person often travels between countries, then, unfortunately, they are also liable for income tax in all the countries where they stay while working. Double residency is avoided in the country of residence, which, in the case where there is a permanent residence in several countries, is determined based on the tax treaty. Tax residency depends on which country this person has a stronger connection with (in which country the person’s family resides, the person has a social connection to or where the person stays for a longer time or where they are a citizen). Read more about the determination of tax residency on the page “Determining residency”.
In which country social security contributions (in Estonia: social tax, unemployment insurance premiums and mandatory funded pension contributions for persons who have joined the mandatory pension pillar) are to be paid in the case of teleworking, the Social Insurance Board or a similar competent authority of other European Economic Area (EEA) State decides, because in contrast to income tax, social security taxes for the time spent working in several States are paid in only one EEA Member State on the remuneration received. In Estonia, an employee cannot pay social tax, unemployment insurance premiums, mandatory funded pension contributions or make an entry in the employment register, also not in the case of having a foreign employer. This must be done by the employer. More information on the page “Social tax”.
If a person works in Estonia, the employer is obliged to declare the remuneration payment every month and pay taxes on it. A non-resident employer who does not have a permanent establishment registered in Estonia must first register as an employer with the Estonian Tax and Customs Board. In Estonia, the employer is also obliged to register employees with the Estonian Tax and Customs Board. If the employer has not withheld income tax, the employee is obliged to declare the salary and pay income tax based on the income tax return submitted once a year.
Example 1
The usual country of employment of an employee of an Estonian employer is Estonia. This person leaves temporarily, for less than 183 days within 12 calendar months, to another country and works while temporarily staying there. The Estonian employer does not have an office or a permanent establishment in that country.
The employee's remuneration will continue to be declared and taxed as usual in Estonia. To continue with the obligation of social security taxes in Estonia, the employee may be asked, in the foreign country, for the certificate confirming the country of social security issued by the Social Insurance Board (form A1).
If the employee is a non-resident in Estonia and their place of residence is in the country where they temporarily went to work for the Estonian employer, then the income tax liability on their remuneration arises from the first day of working in that foreign country, regardless of the number of days they stayed in that country. The Estonian employer does not withhold income tax in Estonia from the remuneration paid for the work of the non-resident in the foreign country during the period when the work was done in the foreign country.
If the Estonian employer would have a permanent establishment in the foreign country, the remuneration of the employee staying in that foreign country while working would be taxed, regardless of the short duration of the employee's stay in the country. So, from the first day, even if the person does not stay in the foreign country for at least 183 days in 12 consecutive calendar months.
Example 2
The usual country of employment of an employee of an Estonian employer is a foreign country. That person comes to work in Estonia temporarily, for less than 183 days within 12 calendar months.
While permanently staying in the foreign country and working, the income tax liability on remuneration is incurred only in the foreign country.
If an Estonian resident employee or a non-resident employee of the Estonian resident employer temporarily stays in Estonia while working, this part of the remuneration is taxed with income tax for all days spent in Estonia, regardless of whether the number of days in 12 consecutive calendar months is less than 183.
The Estonian employer does not withhold income tax or declare the remuneration received by the non-resident while working in the foreign country. The Estonian employer stops withholding income tax from the Estonian resident's remuneration for the time spent in the foreign country, if the employee has proof from the foreign tax authority that the same remuneration has been taxed in the foreign country (and this is in accordance with the foreign legislation and the tax treaty).
During a temporary stay in Estonia, the A1 certificate confirming the social security of the foreign country (if it is a contracting country of the European Economic Area) is required, and social security taxes are paid only to the foreign country, depending on the laws and rules of the foreign country.
Example 3
An Estonian resident works for a Latvian employer according to an employment contract. Work is done in Estonia, Latvia and sometimes while staying in other EU Member States. The employee spends approximately the same amount of time in Estonia and Latvia.
When deciding on the country of taxation of remuneration with income tax, the person's location and residency are more important than the employer's country.
If work is done in the same country where the employer is a resident (Latvia), then income tax is paid to Latvia on this part of the remuneration. The employee who is a resident of Estonia must declare their income earned from all over the world (including Latvia) in Estonia. In Estonia, double taxation of remuneration with income tax is avoided in the income tax return.
If the person has been issued a Latvian social security certificate form A1, then social security contributions from the remuneration received for the time spent in all countries are paid only in Latvia according to the rules there.
If the person has been issued an Estonian social security certificate form A1 approved by the Social Insurance Board, the Latvian employer must register as a non-resident employer in Estonia, register the employee in the employment register and declare and pay social tax, unemployment insurance premiums and, if the Estonian resident employee has joined the II pillar, the mandatory funded pension contributions in Estonia. Read more about the tax liabilities of a non-resident employer in Estonia on the page “Non-resident as an employer”.
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If a person heads abroad permanently and starts teleworking there, the employer needs to make changes when declaring remuneration in Estonia.
An Estonian employer who previously declared remuneration payments of an Estonian resident employee in Annex 1 of form TSD with type “10 – Employment income”, depending on whether the work is carried out temporarily or permanently in the foreign country, must choose another payment type for declaration: “11 – Employment income, work done outside Estonia, certificate A1/ E101 from the Estonian Social Insurance Board”. This is an option if the Social Insurance Board has issued a certificate on form A1 about Estonian social security during a longer stay abroad.
If the person's Estonian residency ends due to moving to a foreign country, the non-resident's remuneration or fringe benefits are not declared by the Estonian employer on form TSD in Estonia.
In a situation where the non-resident, who previously worked in Estonia, left to their home country, but continues to work for their Estonian employer while staying there, the payment was previously declared in Annex 2 of form TSD with the code “120 – Employment income, work done in Estonia” or “121 – employment income, work done in Estonia, certificate A1/E101 from other country”, but now work is done permanently in the foreign country, then the Estonian employer does not declare the non-resident's remuneration or fringe benefits in Estonia on form TSD. It is necessary to fulfil the employer's registration, declaration, and tax payment obligations in the foreign country.
Fringe benefits are declared in Annex 4 of form TSD when working permanently in the foreign country without income tax liability, only with social tax in Estonia, if the employee has been issued an Estonian social security certificate on form A1. - When an employee permanently moves to a foreign country, the employer also makes changes in the employment register: if the social tax liability remains in Estonia, a change must be made regarding the workplace. If there are no more tax liabilities on remuneration in Estonia due to permanent departure to the foreign country, the entry of employment in Estonia is terminated. In addition, it is necessary to find out from the country of employment which registration obligations arise there.
- If a person heads abroad for telework, the employee needs to make changes when declaring remuneration in Estonia. An Estonian employee, who previously saw remuneration pre-filled in table 5.1 of the income tax return, now sees the remuneration data in table 8.9 if they have become a non-resident and the social tax liability is still in Estonia. If the employee's Estonian residency is maintained while working in the foreign country, the Estonian employer's payment is pre-filled in table 8.1. If an Estonian resident employee spends at least 183 days working in a foreign country during 12 consecutive calendar months and their remuneration is taxed with income tax in the foreign country, the employee has the right to declare their remuneration in table 8.8 (in Estonia, income tax is not added).
- If a person is working in Estonia, but the employer is from a foreign country, the employer is obliged to register as a non-resident employer (or a permanent establishment, if it has arisen) and to declare the employee's remuneration and fringe benefits in Estonia on form TSD. If the person's Estonian remuneration data is not pre-filled on the income tax return, then the person is obliged to declare received income in part II of table 5.1 of the income tax return. An employee cannot declare or pay social tax, unemployment insurance premiums or mandatory funded pension contributions on their own behalf, unless the employer has authorised the employee to represent the company at the Tax and Customs Board to do so on behalf of the employer.
- If, while in Estonia, a person provides a short-term, temporary, small-scale service to a foreign employer on the basis of a contract under the law of obligations, the employee has the opportunity to choose the entrepreneur account for taxation of the fee. In this case, the social security tax will also be paid. Income from the entrepreneur account is pre-filled in the person's income tax return, and no additional taxes need to be paid on it.
- If a person permanently provides services to a foreign employer while staying in Estonia based on a contract under the law of obligations, the business must be registered in the Estonian Commercial Register either as a sole proprietor (FIE) or as a company and business income must be declared, sole proprietor’s tax liabilities or employer’s and employee’s tax liabilities as a company must be paid.
In the case of cancellation of an employment contract or release from service, the content of the remuneration to be paid is decisive for the taxation of the compensation prescribed, as well as for the compensation or default interest ordered by a court or a labour dispute committee.
Taxation of remuneration and compensation paid on the basis of the Employment Contracts Act
- Income tax, social tax, unemployment insurance premiums and, in the case of an obligated person, a contribution to a funded pension shall be charged on the remuneration and on the compensation for unused holidays paid on the basis of § 84 of the Employment Contracts Act. The payment must be declared in Annex 1 to the tax declaration form TSD with payment type 10.
- The compensation for lay-off on the basis of § 100 of the Employment Contracts Act is subject to income tax, social tax and, in the case of an obligated person, a contribution to a funded pension. The payment must be declared in Annex 1 to the tax declaration form TSD with payment type 33. Redundancy pay is not subject to unemployment insurance premium (subsection 2 of § 40 of the Unemployment Insurance Act).
- The compensation in the event of termination of employment relationship in court or labour dispute committee paid on the basis of § 109 of the Employment Contracts Act is subject to income tax, social tax and, in the case of an obligated person, to a funded pension contribution. The payment must be declared in Annex 1 to the tax declaration form TSD with payment type 33. The compensation is not subject to unemployment insurance premium (subsection 2 of § 40 of the Unemployment Insurance Act).
- Interest is subject only to income tax and is declared in Annex 1 to the tax declaration form TSD with payment type 16.
Taxation of compensation paid during period of application of restraint of trade clause
- Termination of employment contract by agreement (§ 79 of the Employment Contracts Act). The employer will pay the employee a reasonable monthly compensation for compliance with the agreement on restraint of trade clause after the expiry of the employment contract (subsection 3 of § 24 of the Employment Contracts Act). The compensation paid during the period of application of the restraint of trade clause is subject to income tax, social tax, unemployment insurance premium and, in the case of an obligated person, a contribution to a funded pension. The payment must be declared in Annex 1 to the tax declaration form TSD with payment type 17.
- If the termination of the contract of a member of the management board is based on subsection 3 of § 309 of the Commercial Code (removal of members of management board) and § 631 of the Law of Obligations Act (extraordinary cancellation of authorisation agreement), the compensation paid during the period of application of the restraint of trade clause is subject to income tax, social tax and, in the case of an obligated person, to a funded pension contribution. The payment must be declared in Annex 1 to the tax declaration form TSD with payment type 21. Similarly to the remuneration of a member of the management board, the compensation is not subject to unemployment insurance premium.
Persons receiving the compensation are not registered in the employment register during the period of application of the restraint of trade clause.
As of 2024, subsection 3 of § 12 of the Income Tax Act provides that the income of a natural person does not include:
- any compensation for certified expenses incurred for the benefit of another person,
- compensation for non-pecuniary harm or
- compensation for direct pecuniary harm paid by the state or municipal authority or ordered or approved by a court or a body established for the out-of-court resolution of dispute, except for compensation paid in connection with business.
As a result of the amendment, compensation for non-pecuniary harm that has been awarded or approved by a body established for out-of-court resolution of disputes (e.g. a labour dispute committee) is also exempt from tax.
In practice, the question arises as to how the "compensation for harm" set out in general terms in a decision of a court or a labour dispute committee or in a ruling on approval of a a compromise is taxed.
The general "compensation for harm" is often based on the fact that an employer did not want a dispute and entered into a compromise with an employee. At the same time, the compensation paid by way of compromise also has a content that must be understood in the same way both by the employee and the former employer.
The tax authority refers to the types of harm subject to compensation specified in § 128 of the Law of Obligations Act upon taxing the compensation:
- harm subject to compensation may be pecuniary or non-pecuniary;
- pecuniary harm is, in particular, direct pecuniary harm and loss of profit;
- direct pecuniary harm includes, primarily, the value of the lost or destroyed property or the decrease in the value of property due to deterioration even if such decrease occurs in the future, and reasonable expenses which have been incurred or will be incurred in the future due to the damage, including reasonable expenses relating to prevention or reduction of damage and receipt of compensation, including expenses relating to establishment of the damage and submission of claims relating to compensation for the damage;
- loss of profit is loss of the gains which a person would have been likely to receive in the circumstances, in particular as a result of the preparations made by the person, if the circumstances on which compensation for harm is based would not have occurred. Loss of profit may also include the loss of an opportunity to receive profit.
- non-pecuniary harm involves primarily the physical and emotional distress and suffering caused to the aggrieved person.
Therefore, in the cases of compensation paid upon resolution of a labour dispute, it is also important to find out what kind of claim the employee brought against the former employer in court or the labour dispute committee and what kind of harm is compensated for on the basis of a decision or a ruling on approval of a compromise. In other words, is it compensation for pecuniary harm (including loss of wages) or non-pecuniary harm.
Subsection 3 of § 12 of the Income Tax Act does not apply to compensation for loss of wages. This is also the case in a situation where compensation for loss of wages is paid by way of a compromise concluded in court or in a labour dispute committee.
Practice shows that even in the event of receiving a general "compensation for harm" by way of a compromise, the employee expects the compensation to be taxed like the compensation the employee claimed from the former employer and, as a general rule, it is a claim for loss of wages. Compensation for loss of wages is taxed as income from employment (see compensation in the event of termination of employment relationship).
Therefore, the parties (employee and former employer) must interpret the content of the "compensation for harm" in the same way and it is therefore important to indicate specifically in the decision or in the ruling on approval what is the harm that is being compensated.
The exemption provided for in subsection 3 of § 12 of the Income Tax Act applies only to compensation for direct pecuniary harm and compensation for non-pecuniary harm, which includes physical and mental pain and suffering.
At the legislative level, the concept of voluntary activity or work has not been clarified. At the request of the Ministry of the Interior, “Analysis of the legal environment of volunteering” (PDF, in Estonian) has been drawn up.
The analysis of the legal environment of volunteering shows that volunteering has three main characteristics:
- the activity is carried out of the free will of the person and not in a compulsory or coercive manner;
- volunteers do not receive any financial or material reward, although they may receive benefits (knowledge, skills, experience, contacts, etc.) and, as a thank-you, gifts;
- volunteering takes place outside of the home and family, for the benefit of someone else or society at large.
Volunteering can be categorised according to several characteristics, such as:
- volunteering carried out independently (also in the form of a society or non-formal association) or volunteering organised by organisations (legal persons);
- one-off activities (e.g. events, projects) or regular activities (permanently at the organisation);
- donating free time as a private individual or donating the professional skills of staff from official working time (pro bono) by an organisation (e.g. a company).
By its very nature, voluntary activity creates a relationship under the law of obligations between a volunteer and the person who engages the volunteer. Such a legal relationship may have the characteristics of different relationships under the law of obligations and thereby be similar to a relationship created by an employment contract, contract for services or an authorisation agreement.
As a general rule, voluntary work cannot be regarded as employment on the basis of an employment contract, since, in the case of employment on the basis of an employment contract, it is presumed that the employer pays the employee remuneration for the work done (subsection 2 of § 1 of the Employment Contracts Act). However, voluntary work is not usually provided for remuneration. Therefore, voluntary activity may rather be regarded as a legal relationship on the basis of an authorisation agreement, since, in accordance with § 619 of the Law of Obligations Act, one person (the mandatary) undertakes, in accordance with the agreement, to provide services (complete the mandatary) to another person (the mandator), while the mandator undertakes to pay remuneration to the mandatary for it, if so agreed. In other words, the authorisation agreement does not necessarily require payment of remuneration, but only on the basis of a prior agreement.
If a volunteer does not receive remuneration for his or her work, it is not a relationship under the employment contract and the volunteer is not an employee within the meaning of the Employment Contracts Act. A person who engages volunteers does not have the rights and obligations arising from the Employment Contracts Act (as well as, for example, the Occupational Health and Safety Act) with regard to the volunteers. The volunteer also does not have the corresponding rights and obligations (e.g. rights to ask for working conditions that comply with occupational health and safety requirements and compensation for damage to health, because the Occupational Health and Safety Act applies only to persons working on the basis of an employment contract). A person who engages volunteers does not pay social tax for the volunteers.
If a contract for services, authorisation agreement or other contract under the law of obligations has been entered into with a volunteer or the receipt of material remuneration has been proved in another manner (for example, oral agreements, explanations of persons, etc.), the benefits granted are taxed as fringe benefits on the basis of § 48 of the Income Tax Act similarly to fringe benefits granted to employees. In other cases, the benefits provided to the volunteer are taxed as gifts, donations and costs for entertaining guests on the basis of § 49 of the Income Tax Act.
Due to the principles of voluntary activity, the following can be taken into account upon taxation.
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In general, the work of volunteers is used by non-profit associations (in Estonian ‘mittetulundusühing’) and foundations (‘sihtasutus’), the purpose or main activity of which is not to generate income through economic activities. Voluntary work organised by non-profit organisations and foundations may involve various activities in the public interest and for the benefit of society. If, in connection with the work of volunteers, non-profit associations and foundations incur expenses related to activities specified in their articles of association, including business activities permitted by the articles of association, they do not incur any tax liability. If transport, accommodation and catering expenses are related to activities specified in the articles of association of non-profit associations and foundations (e.g. soup kitchens, sports camps, etc.), these expenses are not taxed. Non-profit organisations and foundations pay income tax on expenses that are not related to activities specified in their articles of association, including the business activities permitted by the articles of association (subsection 3 of § 51 of the Income Tax Act). Costs of entertaining guests, however, are taxed on the basis of subsection 4 of § 49 of the Income Tax Act.
If a non-profit association or foundation allows work to be performed on the basis of an employment contract, a contract under the law of obligations or a contract of a member of the management board and remuneration is paid for it, the work must be registered in the employment register according to the type of work performed.
There is no obligation under the Taxation Act to register in the employment register persons who perform charitable voluntary work without receiving remuneration at a non-profit association or foundation.
Non-profit associations and foundations included in the list of persons benefiting from income tax incentives can bear costs of entertaining guests exempt from tax. If the costs of entertaining are not related to the activities specified in the articles of association of the non-profit association or foundation entered in the list of persons benefiting from income tax incentives, the expenses are taxed on the basis of subsection 3 of § 51 of the Income Tax Act.
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The objective of companies (private limited company (in Estonian ‘osaühing’), public limited company (‘aktsiaselts’)), unlike non-profit organisations (‘mittetulundusühing’) and foundations (‘sihtasutus’), is to generate revenue through economic activities. Generally, companies employ paid labour in their economic activities. If, in addition to its employees, a company has also used volunteers (e.g. in the organisation of paid events) and entered into contracts under the law of obligations with volunteers, the benefits provided to volunteers must be taxed on the same basis as the benefits provided to employees (e.g. transport, accommodation and catering costs).
Persons working on a voluntary basis without any remuneration in the economic interest of a company or self-employed person must be recorded in the employment register (subsection 5 of § 25¹ of the Taxation Act). In the employment register, the type of employment ‘work without wages’ must be selected. This requirement does not extend to voluntary work in non-profit organisations or foundations for which no remuneration is paid.
Pocket money or daily allowance paid to a volunteer (resident natural person) (for work/activity in Estonia) is subject to taxation as income from employment (income tax, social tax and contributions).
Where a natural person is engaged in the economic activity of a company for the purpose of obtaining a personal economic advantage, that activity is no longer voluntary in the usual sense of the term. This gives rise to a relationship between the company and the natural person under the law of obligations, which may be similar to a relationship created by an employment contract, contract for services or an authorisation agreement. All types of relationships involve certain tasks (e.g. selling and/or checking of tickets to an event, sale of goods, catering, etc.), obligations (e.g. to ensure training, tools, etc.) and responsibilities (e.g. financial responsibility, etc.) for companies and natural persons. Therefore, in the case of a company, it must always be assessed whether it is a voluntary activity or a specific activity carried out by a natural person for the purpose of obtaining remuneration.
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.
From 15.04.2024, the Cultural Endowment of Estonia pays fees for creative work instead of benefits in accordance with subsection 3 of § 2 of the Cultural Endowment of Estonia Act.
The Cultural Endowment of Estonia concludes an authorisation agreement with the recipient of the fee for creative work and registers the fee recipient in the employment register.
Fee for creative work is divided by the number of months of the creative period and is paid in each month. Fee for creative work is paid to the recipient as a salary, and the payment is declared on the tax declaration form TSD. Fee for creative work is taxed with all labour taxes, including income tax, social tax, unemployment insurance premiums and, in the case of a registered person, mandatory funded pension contributions.
The Cultural Endowment of Estonia submits a declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension (form TSD) by the 10th of every month.
The application for and payment of the fee for creative work is regulated by the Cultural Endowment of Estonia.
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 654 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 654 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.
NB! If in 2023 and earlier it was possible for a parent to take into account in the income tax return the increased basic exemption of a child up to 17 years old (1,848 euros for the second child and 3,048 euros from the third child was reduced by the child's earned wage), then from 1 January 2024, the parent no longer has the right to deduct the increased basic exemption of a child from their own taxable income.
According to subsection 4 of § 23 of the Income Tax Act, a person has the right to amend the 2023 natural person’s income tax return and apply for a recalculation and refund of income tax on the compensation for termination or release from service paid due to redundancy (hereinafter referred to as redundancy pay) in the fourth quarter of 2023 (October, November, December) under the Employment Contracts Act, the Civil Service Act or the Unemployment Insurance Act.
Since receiving redundancy pay for several months at the end of the year (in the fourth quarter) increased a person's total taxable income for 2023 and thus reduced the basic exemption, as a result of the recalculation, the person has the right to transfer part of the compensation amount and the income tax withheld from it to the tax calculation for the following year, i.e. 2024.
For example, if a person received redundancy pay for two months in December 2023, they have the right to amend their 2023 income tax return and transfer the amount of one month's redundancy pay and the income tax withheld from it to their 2024 income tax return, so that the calculation of taxable income, basic exemption, and therefore income tax liability would be fairer for two years (2023, 2024).
A person has the right, not the obligation, to amend their income tax returns if it results in a more favourable tax calculation for the person! However, a person must consider that amending the 2023 income tax return will also result in changes to the 2024 income tax return. Therefore, it is important to consider the calculation of income tax for both years.
Declaration of redundancy pay received in the fourth quarter of 2023
The redundancy pay paid in the fourth quarter and the income tax withheld from it must be reduced by a person in Part I of Table 5.1 of Form A of the 2023 income tax return as follows:
- by 1/3 of the redundancy pay received, if the redundancy payment was made in November and the compensation was received for three months,
- by 2/3 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for three months,
- by 1/2 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for two months.
NB! If a recalculation is made in the 2023 income tax return and part of the redundancy pay is carried forward to 2024, the amount carried forward will be pre-filled in the 2024 income tax return.
- The amount carried forward will increase the person’s taxable income and withheld income tax for 2024, which are indicated in Part I of Table 5.1 of Form A of the income tax return.
- Income tax and basic exemption are calculated based on the rates that apply in the year of the income carried forward.
- If the amount of redundancy pay for the fourth quarter of 2023 was carried forward to 2024, the 2024 income tax rate of 20% and the basic exemption calculation system will apply to it.
According to subsection 4 of § 23 of the Income Tax Act, a person has the right to amend the 2024 natural person’s income tax return and apply for a recalculation and refund of income tax on the compensation for termination or release from service paid due to redundancy (hereinafter referred to as redundancy pay) in the fourth quarter of 2024 (October, November, December) under the Employment Contracts Act, the Civil Service Act or the Unemployment Insurance Act.
Since receiving redundancy pay for several months at the end of the year (in the fourth quarter) increased a person's total taxable income for 2024 and thus reduced the basic exemption, as a result of the recalculation, the person has the right to transfer part of the compensation amount and the income tax withheld from it to the tax calculation for the following year, i.e. 2025.
For example, if a person received redundancy pay for two months in December 2024, they have the right to amend their 2024 income tax return and transfer the amount of one month's redundancy pay and the income tax withheld from it to their 2025 income tax return, so that the calculation of taxable income, basic exemption, and therefore income tax liability would be fairer for two years (2024, 2025).
A person has the right, not the obligation, to amend their income tax returns if it results in a more favourable tax calculation for the person! However, a person must consider that amending the 2024 income tax return will also result in changes to the 2025 income tax return. Therefore, it is important to consider the calculation of income tax for both years.
Declaration of redundancy pay received in the fourth quarter of 2024
The redundancy pay paid in the fourth quarter and the income tax withheld from it must be reduced by a person in Part I of Table 5.1 of Form A of the 2024 income tax return as follows:
- by 1/3 of the redundancy pay received, if the redundancy payment was made in November and the compensation was received for three months,
- by 2/3 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for three months,
- by 1/2 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for two months.
NB! If a recalculation is made in the 2024 income tax return and part of the redundancy pay is carried forward to 2025, the amount carried forward will be pre-filled in the 2025 income tax return.
- The amount carried forward will increase the person’s taxable income and withheld income tax for 2025, which are indicated in Part I of Table 5.1 of Form A of the income tax return.
- Income tax and basic exemption are calculated based on the rates that apply in the year of the income carried forward.
- If the amount of redundancy pay for the fourth quarter of 2024 was carried forward to 2025, the 2024 income tax rate of 22% and the basic exemption calculation system will apply to it.
NB! 2025 is the last year when the redundancy pay amount for the fourth quarter can be carried forward to the next year.
From 2026, basic exemption will no longer depend on the amount of a person’s income. Therefore, it will no longer be possible to carry forward redundancy pay to the next year.
According to subsection 4 of § 23 of the Income Tax Act, a person has the right to amend the 2025 natural person’s income tax return and apply for a recalculation and refund of income tax on the compensation for termination or release from service paid due to redundancy (hereinafter referred to as redundancy pay) in the fourth quarter of 2025 (October, November, December) under the Employment Contracts Act, the Civil Service Act or the Unemployment Insurance Act.
Since receiving redundancy pay for several months at the end of the year (in the fourth quarter) increased a person's total taxable income for 2025 and thus reduced the basic exemption, as a result of the recalculation, the person has the right to transfer part of the compensation amount and the income tax withheld from it to the tax calculation for the following year, i.e. 2026.
For example, if a person received redundancy pay for two months in December 2025, they have the right to amend their 2025 income tax return and transfer the amount of one month's redundancy pay and the income tax withheld from it to their 2026 income tax return, so that the calculation of taxable income, basic exemption, and therefore income tax liability would be fairer for two years (2025, 2026).
A person has the right, not the obligation, to amend their income tax returns if it results in a more favourable tax calculation for the person! However, a person must consider that amending the 2025 income tax return will also result in changes to the 2026 income tax return. Therefore, it is important to consider the calculation of income tax for both years.
Declaration of redundancy pay received in the fourth quarter of 2025
The redundancy pay paid in the fourth quarter and the income tax withheld from it must be reduced by a person in Part I of Table 5.1 of Form A of the 2025 income tax return as follows:
- by 1/3 of the redundancy pay received, if the redundancy payment was made in November and the compensation was received for three months,
- by 2/3 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for three months,
- by 1/2 of the redundancy pay received, if the redundancy payment was made in December and the compensation was received for two months.
NB! If a recalculation is made in the 2025 income tax return and part of the redundancy pay is carried forward to 2026, the amount carried forward will be pre-filled in the 2026 income tax return.
- The amount carried forward will increase the person’s taxable income and withheld income tax for 2026, which are indicated in Part I of Table 5.1 of Form A of the income tax return.
- Income tax and basic exemption are calculated based on the rates that apply in the year of the income carried forward.
- If the amount of redundancy pay for the fourth quarter of 2025 was carried forward to 2026, the 2026 income tax rate of 22% and the basic exemption calculation system will apply to it.
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 and salaries
- income tax 22%
- social tax 33%
- unemployment insurance premiums
(employee's rate 1.6% and employer's rate 0.8%) - contributions to funded pension
(2%, 4% or 6% 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: 16.02.2026
