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Taxation of the remuneration of a crew member

The Act Amending the Law of Ship Flag and Ship Registers Act and Income Tax Act and Act Amending Other Related Acts was published in Riigi Teataja on 4 March 2019 and in Riigi Teataja on 28 February 2020. The amendments entered into force on 1 July 2020.

Below we address in detail the taxation of the remuneration of a ship and aircraft crew member, data reporting in the employment register and filing tax returns and provide an overview of state aid.

The guide aims to educate employers on the special tax arrangement applicable to the remuneration of a crew member if the employer is:

  • an Estonian resident company,
  • a non-resident acting as employer in Estonia or
  • a fixed establishment in Estonia of a non-resident.

The Maritime Administration of Estonia advises on and verifies meeting criteria for ships, dredgers and tugboats (questions related to state aid and shipping tax differences: estonianflag@vta.ee or tel +372 6205 775). The Estonian Tax and Customs Board receives data ships meeting criteria from the Maritime Administration of Estonia.

What is the

income tax treatment of Estonian resident crew members?

The remuneration paid to a crew member is subject to income tax at the rate of 0% if the remuneration was due for employment on a ship which:

  1. has gross tonnage of at least 500 and is used for international carriage of goods and passengers by sea within the meaning of § 52¹ (5) of the Income Tax Act, except passenger ships engaged in regular service in the European Economic Area, and
  2. flies the flag of a Contracting State. (Income Tax Act, § 4 (6) and § 13 (5))

Pursuant to § 52¹ (5) of the Income Tax Act, carriage of goods and passengers by sea shall be deemed international if more than 50% of the voyages take place:

  1. between an Estonian port and a foreign port;

  2. between an Estonian port and a facility located outside the territorial sea of Estonia;

  3. between the ports in a foreign country or in foreign countries;

  4. between a foreign port and a facility located off the shore.

The remuneration paid to a crew member is subject to income tax at the rate of 0% if the remuneration was due for employment on a dredger or tugboat (Income Tax Act, § 52¹ (11)),

  1. which has gross tonnage of at least 500 and
  2. flies the flag of a Contracting State,

assuming that more than 50% of the operational time of the dredger or tugboat is spent in maritime transport. (Income Tax Act, § 4 (6) and § 13 (6))

Under § 52¹ (11) of the Income Tax Act activities carried out with a dredger or a tugboat outside the port and the territorial sea of Estonia shall also be deemed to be international carriage of goods or passengers by sea if more than 50% of the operational time of the dredger or tugboat is spent in maritime transport, and only in respect of such transport activities.

  • Contracting States are Contracting States of the European Economic Area Agreement, which are the European Union Member States and Iceland, Norway and Liechtenstein.
  • Regular service in the European Economic Area means service between ports of the European Economic Area. Passenger ships are defined as ships carrying more than twelve passengers, and cargo ships are defined as ships not deemed passenger ships.
  • Regular service is defined as a service of consecutive voyages between two or more ports on the basis of a published schedule of voyages (scheduled service) or regularly or at sufficient frequency that a systematic service is readily recognisable.

The income tax rate of 0% is not applicable to income from employment on passenger ships engaged in regular service in the European Economic Area, including cruise ships.

§ 41 1) of the Income Tax Act stipulates that income tax shall be withheld on the remuneration paid to a crew member (the remuneration as defined in Income Tax Act, § 13 (5) and (6)). Therefore, resident employers report on Form TSD Annex 1 (type of payment 70) the actual employment income of a crew member calendar month and income tax withheld at the rate of 0%.

The basis for taxation for the purposes of the Social Tax Act, Unemployment Insurance Act and Funded Pensions Act is the remuneration of 750 euros per calendar month. The Income Tax Act does not stipulate such a limit.

§ 42 (9) of the Income Tax Act provides that income tax basic exemption is not applicable to the remuneration paid to a crew member (Income Tax Act, § 13 (5) and (6)).

Deductions stipulated in § 23–28¹ of the Income Tax Act cannot be made from the remuneration of a crew member taxed at the income tax rate of 0%. (Income Tax Act, § 28² (4))

Therefore, the remuneration of a crew member is not subject to the following deductions: the basic exemption, increased basic exemption upon provision of maintenance to child, increased basic exemption for spouse, housing loan interest, training expenses, gifts and donations, insurance premiums and acquisition of pension fund units and mandatory social security contributions.

income tax treatment of the remuneration paid to a non-resident flight crew or ship crew member?

The general rule is that income tax (the regular rate of 20%) applies to income that a non-resident natural person received for employment as member of crew on international transport flights or ships carrying cargo or passengers internationally by sea if such person’s employer or the operator of such aircraft or ship is a person defined in § 29 (1) of the Income Tax Act. (Income Tax Act, § 29 (1¹))

§ 29 (1) of the Income Tax Act lists the following persons: Estonian state or local government authority or resident or a non-resident operating in Estonia as an employer or a non-resident through or on account of its permanent establishment located in Estonia.

An exception to the taxation of the remuneration paid to a non-resident ship crew member at the income tax rate of 0% is applicable if such remuneration was due for employment on ships meeting the conditions specified in § 13 (5) or (6) of the Income Tax Act. (Income Tax Act, § 29 (1²))

§ 41 2) of the Income Tax Act stipulates that income tax shall be withheld on income from employment on a ship meeting the conditions specified in § 13 (5) or (6) of the Income Tax Act (§ 29 (1²) of the Income Tax Act) at the beneficial rate of 0%.

Therefore, resident employers report on Form TSD Annex 2 (type of payment 270) the actual non-resident crew member salary per calendar month and income tax withheld at the rate of 0%.

social tax?

Social tax is due on wages and other remuneration of ship crew members

  • working on Estonian flagged ships or
  • subject to Estonian law pursuant to Regulation (EC) No. 883/2004 of the European Parliament and of the Council on the coordination of social security systems (OJ L 166, 30.4.2004, pp. 1–123) or a foreign treaty on social security of the Republic of Estonia. (Social Tax Act, § 2 (1) 1¹))

The ship flying the flag of Estonia is a further condition to payment of social tax, contributions to mandatory funded pension and unemployment insurance premiums.

Social tax at the rate of 20% is applicable to (Social Tax Act, § 7 (2¹)) the employee’s monthly remuneration

  • which for crew members is up to 750 euros per month of employment if such remuneration is for employment on a ship meeting the criteria laid out in § 13 (5) of the Income Tax Act.
  • On the starting or ending month of a crew member’s employment or in cases specified in § 19 of the Employment Contracts Act employment income is scaled according to the number of days worked. (Social Tax Act, § 2 (4) 8))

Only the portion attributable to pension insurance is due as social tax (20%). Ship crew members are not subject to compulsory health insurance and therefore the employer is exempt from paying the health insurance portion of the social tax (13%). Crew members have the option to purchase state health insurance.

unemployment insurance premium?

§ 3 of the Unemployment Insurance Act was amended by adding (1¹) which stipulates that an employee that is a crew member of a ship specified in § 13 (5) or (6) of the Income Tax Act is an insured person if he or she is:

  • a citizen of a European Economic Area Contracting State or the Swiss Confederation or
  • a person who lawfully resides in these countries or
  • a person with regard to whom the provisions of an international agreement entered into by the Republic of Estonia concerning unemployment benefits apply.

The Agreement on Social Security between Canada and the Republic of Estonia does not address unemployment benefits. The Agreement on Social Security between Ukraine and the Republic of Estonia addresses unemployment benefits and is available on the webpage “EU Law and Social Security Agreements".

Unemployment insurance premiums are due in case of crew members on 750 euros according to the rate of unemployment insurance premium established for the insured persons and employers. (Unemployment Insurance Act, § 40 (1) 3))

Employers must:

Operators within the meaning of the Seafarers Employment Act are deemed employers subject to unemployment insurance premiums. (Unemployment Insurance Act, § 4 (2) 5))

Unemployment insurance benefits are based on employment income that was subject to unemployment insurance premiums.

contribution to mandatory funded pension?

The Funded Pensions Act was amended by the insertion of subsection § 7 (4) which stipulates that upon making a contribution on the salary and other remuneration paid to a crew member for employment on a ship which complies with the conditions specified in subsections 13 (5) and (6) of the Income Tax Act, clause 2 (4) 8) and subsections subsections 6² (2)‒(4) of the Social Tax Act apply.

Therefore, contributions to mandatory funded pension are made which for crew members is up to 750 euros per month of employment if such remuneration is for employment on a ship meeting the criteria laid out in subsections 13 (5) or (6) of the Income Tax Act. On the starting or ending month of a crew member’s employment or in cases specified in § 19 of the Employment Contracts Act employment income is scaled according to the number of days worked.

How is data reported in the employment register?


Crew members are registered in the employment register under the employment type of “contract of employment with crew member benefit”. The Estonian personal ID number of the crew member and the IMO number of the ship are required for the registration of a crew member in the employment register. Ship data are sent to the Estonian Tax and Customs Board by the Maritime Administration of Estonia. If the Estonian Tax and Customs Board has no data on the ship, the employment entry involving the crew member cannot be made of the type “contract of employment with crew member benefit”. In order to make such entry the company must first contact the Maritime Administration of Estonia and submit required documentation to prove that the ship meets state aid conditions. The Maritime Administration of Estonia can send updated information on the ship to the Estonian Tax and Customs Board.

If the ship no longer belongs to the favourable special arrangement, the company must terminate the crew member’s employment entry of the type “crew member employment contract subject to favourable tax treatment” in the employment register. A new employment entry must be made for the crew member of the type “employment contract”.

How is tax liability declared?


The employer is an Estonian company or a foreign company operating as an employer in Estonia:

  • the wages of a crew member who is resident in Estonia are declared in Annex 1 to Form TSD (the income tax rate is 0%; if the crew member works on a ship bearing the Estonian flag, the social tax rate is 20% for up to 750 euros and the standard rate is applied to unemployment insurance premium and contribution to mandatory funded pension);

  • the wages of a crew member who is not resident in Estonia are declared in Annex 2 to Form TSD (the income tax rate is 0%; if the crew member works on a ship bearing the Estonian flag or holds the Estonian A1 certificate, the social tax rate is 20% for up to 750 euros and the standard rate is applied to unemployment insurance premium).

The crew member who is resident in Estonia and resident in the EEA Contracting State, whose employer is an Estonian company or a foreign company operating as an employer in Estonia, declares wages in the new table 7.3 of the income tax return for a resident natural person (pre-filled on the basis of Annexes 1 and 2 to Form TSD). The remuneration is calculated as annual income, but the income tax rate is 0% and therefore the person cannot make deductions from income.

The crew member who is resident in Estonia, whose employer is a foreign company and:

  • who works in a foreign country but on a compliant ship, declares wages in the new table 7.3 of the income tax return with the income tax rate of 0%. The remuneration is calculated as annual income, but the income tax rate is 0% and therefore the person cannot make deductions from income. In the income tax return the person must also indicate the IMO number of the ship, by means of which the Estonian Tax and Customs Board will verify the ship’s compliance with the conditions of the special arrangements from the Maritime Administration.

  • who works in a foreign country but on any other ship, declares wages, as a general rule, in table 8.1 or table 8.8. The remuneration is calculated as annual income and deductions can be made from income.
     

Which social security taxes are imposed on earned wages?


A uniform tax basis of 750 euros per month worked is applied to the payment of social tax and other social security payments for crew members. If several month’s salary is paid all at once then taxes are calculated and declared on the monthly rate of 750 euros (by multiplying the number of months worked by 750 euros).

The following employment taxes are due on the monthly rate:

  • employer’s social tax at the rate of 20% (portion attributable to pension);
  • employer’s unemployment insurance premium at the rate of 0.8% if the crew member is a citizen of a European Economic Area Contracting State or the Swiss Confederation or a person who lawfully resides in these countries or a person with regard to whom the provisions of an international agreement entered into by the Republic of Estonia concerning unemployment benefits apply.
  • employee’s unemployment insurance premium at the rate of 1.6% if the crew member is a citizen of a European Economic Area Contracting State or the Swiss Confederation or a person who lawfully resides in these countries or a person with regard to whom the provisions of an international agreement entered into by the Republic of Estonia concerning unemployment benefits apply.
  • contributions to mandatory funded pension at the rate of 2% if an Estonian resident employee is the obligated person.

The income tax due for withholding is 0% and it is declared on the actual salary. In addition, if a crew member has worked the full month but his or her remuneration is lower than 750 euros, the social tax and other social security payments are calculated on the actual remuneration.

The wages or other remuneration paid to a crew member are declared on Form TSD Annex 1, Part II (resident) or Form TSD Annex 2 Part III (non-resident) “Special arrangement applicable to crew members”.

State aid


State aid, as per the definition of Article 107 (1) of the Treaty on the Functioning of the European Union is:

  • income tax due on the remuneration of a crew member. The granting of state aid is based on the European Commission’s guidelines of state aid related to maritime transport (hereinafter guidelines on maritime state aid) and the European Commission’s decision authorising such state aid. A state aid recipient is a person specified in subsection 40 (1) of the Income Tax Act that meets the conditions provided for in subsection (5) and in clauses 52¹ (3) 4) and 5) of the Income Tax Act. (Income Tax Act, § 13 (7))
  • the difference of social tax applied at the 33% rate on the wages or other remuneration and social tax applied at the 20% rate on 750 euros (the amount specified in § 2 (4) 8) of the Social Tax Act). The granting of state aid is based on the European Commission’s guidelines of state aid related to maritime transport and the European Commission’s decision authorising such state aid. A state aid recipient is a person specified in § 4 of the Social Tax Act that pays social tax at the 20% rate and on 750 euros. (Social Tax Act, § 6² (1))
  • unemployment insurance premium calculated on the remuneration in excess of 750 euros (the rate specified in § 2 (4) 8) of the Social Tax Act). The granting of state aid is based on the European Commission’s guidelines of state aid related to maritime transport and the European Commission’s decision authorising such state aid. State aid recipient is an operator within the meaning of the Seafarers Employment Act whose employee is a person specified in § 3 (1¹) of the Unemployment Insurance Act. (Unemployment Insurance Act, § 40¹ (1) )

A state aid recipient:

  1. must not be a firm in difficulty within the meaning of the community guidelines issued by the European Commission on state aid for rescuing and restructuring firms in difficulty;
  2. must not have failed to perform their obligation to repay state aid deemed illegal and incompatible with the internal market under a decision by the European Commission. (Income Tax Act, § 13 (7), Social Tax Act, § 6² (2), Unemployment Insurance Act, § 40¹ (2))

The Ministry of Economic Affairs and Communications or an organisation authorised by it shall calculate the size of state aid on the basis of necessary data provided by the Estonian Tax and Customs Board and shall enter the data in the register of state aid and de minimis aid as specified in § 49² of the Competition Act, as well as performing supervision of

The procedure on state aid shall be applied until the conditions have been met but not longer than until the end of the validity period of the decision by the European Commission authorising such state aid. In case of a failure to meet the conditions for the application of state aid there exists a right to apply state aid once again after the expiry of the decision by the European Commission authorising such state aid under the condition that the European Commission has issued a new permission for state aid and conditions for the application of state aid have been met. (Income Tax Act, § 13 (7) Social Tax Act, § 6² (4) Unemployment Insurance Act, § 40¹ (4)

April 2020
 

29.10.2020