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Social tax incentive for employers of persons with decreased working ability since 1 July 2016

On 1 July 2016, the procedure for the compensation of social tax by the state for a person with decreased working ability changed. The concept ‘person receiving pension for incapacity for work’ is not used any more but the concept ‘person with decreased working ability’ is used on applying for social tax incentive. Employers under who an employee with decreased working ability is working (the person who has been established to have partial or no work ability or, according to the old system, permanent incapacity for work of at least 40 per cent (up to the end of its validity) may now apply for social tax incentive from the Estonian Unemployment Insurance Fund. You can read more on the home page of the Unemployment Insurance Fund: "Social tax compensation for a person with decreased working ability".

Additional information about work ability reforms is available on the home page of the Ministry of Social Affairs: "Work ability reforms" (in Estonian).

Pursuant to the procedure established as of 1 July 2016, employers submitted monthly applications to the Estonian National Social Insurance Board to have the state pay social tax paid for employees having incapacity for work. The last period for which the payment of social tax from the Social Insurance Board could be applied was June 2016. After 4 July 2016 the applications submitted for the previous periods to the Social Insurance Board would be denied, the Estonian Unemployment Insurance Fund would not accede to such applications as well. The Unemployment Insurance Fund will accede to applications for the period starting from 1 July 2016.

 

Below we explain it more particularly and give examples for declaration of social tax for an employee with decreased working ability.

Social tax payment by the state and an employer for a person with decreased working ability is regulated by clause 6 (1) 5) and subsection 6 (3) of the Social Tax Act.
 

The Unemployment Insurance Fund pays social tax for an employee with decreased working ability on the basis of a single application


Pursuant to clause 6 (1) 5) of the Social Tax Act, the state shall pay social tax (through the Unemployment Insurance Fund) for the employees of a company, non-profit association, foundation or sole proprietor who are persons with partial or no work ability and for payment of social tax for whom the employer has submitted a corresponding application. The condition of partial or no work ability shall be considered met also in case of a person who has been established to have permanent incapacity for work of at least 40 per cent on the basis of the State Pension Insurance Act (subsection 13 (15) of the Social Tax Act).

An employee is a person who is working at the employer mentioned above under the employment contract (there must be the correct type of employment recorded in the employment register). The state shall not pay social tax for the person who gets remuneration on the basis of contracts for services, authorisation agreements or other contracts under the law of obligations or remuneration for a member of the management board.

The employee has to prove to the employer that he/she is a person with decreased working ability submitting a decision by the Unemployment Insurance Fund on partial or no working ability or a pension certificate issued by the Social Insurance Board where there shall be an endorsement about the corresponding type of pension (pension for incapacity for work) and term. On the basis of this the employer can apply for the payment of the state pay social tax for the employee from the Unemployment Insurance Fund. If an employee with decreased working ability has employment relationships with several employers, then the employer who, for the purposes of withholding income tax, calculates the basic exemption according to subsections 42 (1) and (2) of the Income Tax Act, has the right to apply for social tax incentive. If the employee has not submitted an application for calculating the basic exemption to any employer, he/she completes a written declaration selecting one employer for whom the state pays the social tax.

The employer shall submit an application to the Unemployment Insurance Fund indicating the following information: the first and surname of the person with decreased working ability, personal identification code, the date of commencement of the employment and the confirmation that the employer meets the conditions provided for in subsection 6 (3) of the Social Tax Act. The Application Form is available on the home page of the Unemployment Insurance Fund (DOC).

The procedure for the payment of the state pay social tax is established by Minister of Finance Regulation No. 113 of 31 December 2003 (the version entered into force on 01.07.2016). In accordance with the procedure, the Estonian Unemployment Insurance Fund shall keep the accounting of the state pay social tax, shall calculate and pay social tax by the state based on the application submitted by an employer once (if earlier applications had to be submitted to the Social Insurance Board every month, then now a single application is enough). The Unemployment Insurance Fund shall pay social tax for an employee with decreased working ability pursuant to the monthly rate (on monthly rate 430 euros the social tax of 33% was 141.90 euros per month in 2017; on monthly rate 470 euros the social tax of 33% was 155.10 euros per month in 2018; on monthly rate 500 euros the social tax of 33% was 165 euros per month in 2019) regardless of the amount of remuneration paid to the employee by the employer.

The date on which the social tax liability is created shall be the date of submission of the application to the Unemployment Insurance Fund, but the date of creation of the liability may not be earlier than the date of establishment of partial or no working ability of the employee or the date of his/her commencement of the employment relationship that had been entered in the employment register laid down in section 251 of the Taxation Act (the date of the commencement of the employment relationship of the employee). The application cannot be submitted retroactively (as an exception, the application was allowed to be submitted to the Unemployment Insurance Fund during the transition period for July 2016 up to 2 August 2016).

If the obligation of the Unemployment Insurance Fund to pay social tax for the person arises or terminates in the middle of the reporting month, the amount of social tax due shall be calculated in proportion to the number of the calendar days for which the Unemployment Insurance Fund is obliged to pay the social tax (see example 1 and example 5).
 

The employer shall declare the social tax for an employee with decreased working ability in Annex 1 to Form TSD


The principles of declaration of social tax incentives on Form TSD shall not change. Form TSD shall be submitted to the Estonian Tax and Customs Board by the 10th day of the month following the month the payment is made.

The employer has not an obligation to pay social tax for an employee with decreased working ability on an amount of the monthly rate of social tax, the employer shall calculate the social tax on actual wages regardless of its amount (clause 2 (4) 6) of the Social Tax Act). If the Unemployment Insurance Fund pays the social tax for such an employee, then the employer shall pay the social tax on the part of the remuneration exceeding the sum which is the calculation basis for the social tax paid by the Unemployment Insurance Fund (subsection 6 (3) of the Social Tax Act).

In order to use the social tax incentive, the employer shall declare the part of the remuneration paid to the employee with decreased working ability in the taxable period on which the social tax for the employee shall be paid by the Unemployment Insurance Fund in Annex 1 to Form TSD of his/her tax return under code 1070. If wages are less than the amount on which the Unemployment Insurance Fund pays social tax, then the wages paid to the employee shall be indicated under code 1070 (see example 4).

The payment amount subject to social tax declared under code 1060 shall be reduced by the amount under code 1070, on which the social tax to be paid by the employer shall be calculated and indicated under code 1100: code 1100 = (code 1060 – code 1070) × 33%.

Example 1. Recruitment of a person with decreased working ability

The date of entry into employment of a person with partial work ability (in the employment register and in the application to be submitted to the Unemployment Insurance Fund) is 1 August 2019.

The employer submits an application for the payment of social tax to the Unemployment Insurance Fund on 10 August, thus the obligation to pay social tax for the Unemployment Insurance Fund shall arise from 10 August. The social tax to be paid by the Unemployment Insurance Fund for August shall be calculated in proportion to the number of calendar days for which the Unemployment Insurance Fund is obliged to pay the social tax:
500 ÷ 31 × 22 = 354.84 × 33% = 117.10 euros.

The employee has been calculated wages for August 540 euros. The wages shall be paid on 5 September and declared in Annex 1 to Form TSD in September (the deadline for submission is 10 October) where the employer shall pay in addition to the actually paid gross amount (code 1060) of the wages in the amount of 540 euros, the employer shall declare under code 1070 the sum in the amount of 354.84 euros or the part of the wages on which the social tax shall be paid by the Unemployed Insurance Fund. If the tax return is completed in the e-Tax Board, then the system of the Estonian Tax and Customs Board shall calculate the social tax based on the data declared:

code 1020 type of payment 10;
code 1030 sum of payment 540 euros;
code 1060 = code 1030 = 540 euros;
code 1070 = 354.84 euros;
code 1100 = (code 1060 – code 1070) × 33% = (540 – 354.84) × 33% = 61.10 euros.

Example 2. Holiday of an employee with reduced capacity for work

The wages for an employee receiving pension for incapacity for work is 540 euros in a month. A single application for the payment of social tax for this employee has been submitted to the Unemployment Insurance Fund on 2 July. The employee is on holiday from 1 September till 30 September. In September the employee is paid his/her wages 540 euros and the holiday pay for September 540 euros, totally 1080 euros.

Annex 1 to Form TSD for September:

code 1030 = code 1060 = 1080 euros;
code 1070 = 500 + 500* = 1000 euros;
Social tax under code 1100 = (1080 – 1000) × 33% = 26.40 euros.

* The employer has the right to use social tax incentive at a double rate whereas the holiday pay is paid in September and no payment to the employee is made in October.

If an employee, for an example, is on holiday from 16 August until 14 September and receives holiday pay 270 euros for September holiday days in August but the wages 270 euros for the September workdays he/she receives in October, then he/she can use half of the social tax incentive in August and another half in October.

Example 3. Holiday without pay or temporary incapacity for work of an employee with decreased working ability

If an employee, for whom the Unemployment Insurance Fund pays social tax, is a whole month on holiday without pay or ill, i.e. he/she is not paid wages for the month and no social tax is calculated for him/her, then the employer has no right to reduce its social tax liability for other months.

Example 4. Person with decreased working ability who works on a part-time basis (wages are less than 500 euros)

An employee works on a part-time basis and receives wages 300 euros in a month.

The employer has submitted a single application for the employee to the Unemployment Insurance Fund for the transfer of the state pay social tax. The employer itself does not pay social tax on the wages of this employee. In Annex 1 to Form TSD it is indicated: code 1030 = code 1060 = 300 euros and code 1070 = 300 euros, as a result, the social tax under code 1100 = 0.

The sum declared under code 1070 must not exceed the amount of actual payment (although the Unemployment Insurance Fund pays social tax on the amount of 500 euros)!

Item 10 of the procedure for completion in Annex 1 to Form TSD (PDF) approved by Minister of Finance Regulation No. 60 of 29 November 2010 reads: “Under code 1070 the part of remuneration paid to the person with partial or no work ability during the taxable period is indicated on which the Estonian Unemployment Insurance Fund pays social tax on the basis of the application submitted by the employer and by which the wages subject to social tax shall be reduced (subsection 6 (3) of the Social Tax Act). If the wages paid to the person with partial or no work ability are less than the amount on which the Estonian Unemployment Insurance Fund pays social tax, then under code 1070 the wages paid to the employee shall be given."

Example 5. Social tax on termination of employment

If the obligation of the state to pay social tax for the person terminates in the middle of the reporting month, the amount of social tax due shall be calculated in proportion to the number of the calendar days for which the state is obliged to pay the social tax.

The employee with decreased working ability for whom the Unemployment Insurance Fund pays social tax is made redundant, the last day of employment is 17 December (entry of the last date of employment in the employment register). The Unemployment Insurance Fund pays the last social tax in proportion to the number of days worked in December:
500 ÷ 31 × 17 = 274.19 × 33% = 90.48 euros.

The last month, when the employer may use the incentive provided for in section 6 of the Social Tax Act, is the month when the payment subject to the last social tax is made or of the payment of the final settlement is effected to the employee. The November wages 540 euros and the final settlement 320 euros in the total amount of 860 euros are paid in December, thus the employer has the right to reduce the payment subject to social tax made to the person in December (wages + final settlement) by the amount on which the Unemployment Insurance Fund pays social tax for two months (November and 17 days in December):

Annex 1 to December Form TSD, code 1030 = code 1060 = 860 euros;
code 1070 = 774.19 euros (500 + 274.19);
the social tax of the employer under code 1100 = (860 – 774.19) × 33% = 28.32 euros.

Example 6. Reduction of the social tax base in the event of the monthly rate of social tax changing from 1 January

If a one-off application has been filed by the employer, the state (Estonian Unemployment Insurance Fund) will pay social tax at the monthly rate of social tax applicable in the accounting period. Thus, since a monthly rate of social tax of 470 euros applied in December 2018, the state will pay social tax on 470 euros for December 2018. In January 2019, the monthly rate of social tax of is 500 euros, thus the state will pay social tax on 500 euros for the January 2019 accounting period.

The employer will take a benefit into account when pay is disbursed, based on the monthly rate on which the state has paid social tax for the accounting period, completing code 1070 in Annex 1 of the TSD Form. The employer has to look at each month separately, that is, if, for example, several months’ pay is disbursed at one time, the benefit is added up based on what monthly rates applied during the specific accounting periods. Any unused portion is not transferred to subsequent months (calculation separate for each month). If the gross amount of pay for a specific month is lower than the monthly rate, an amount corresponding to the gross amount may be considered as a reduction.

Hence, if:

  1. December pay is disbursed at the end of the accounting period in December, 470 euros may be shown as a reduction under code 1070 in Annex 1 of the TSD Form filed for December (monthly rate of social tax applicable in the accounting period of December 2018);

  2. December pay is disbursed at the beginning of the following month in January 2019, 470 euros may be shown as a reduction under code 1070 in Annex 1 of the TSD Form filed for January (monthly rate of social tax applicable in the accounting period of December 2018);

  3. December pay is disbursed late in March 2019, 470 euros may be shown as a reduction under code 1070 in Annex 1 of the TSD Form filed for March (monthly rate of social tax applicable in the accounting period of December 2018). If, for example, in addition to December pay also January and February pay is disbursed in March, benefits are added up under code 1070 for all the months for which pay has been paid at one time.

    For example, if pay for December 2018 is 500 euros, pay for January 2019 is 300 euros, pay for February is 540 euros and pay is disbursed at one time in March 2019, 470 (for December) + 300 (for January; please note: the gross amount was less than the monthly rate of social tax applicable in January) + 500 (for February) or a total of 1270 euros may be shown as a reduction under code 1070 in Annex 1 of the March TSD, and the employer will incur social tax liability on 70 euros.

  4. January pay is disbursed in January – under code 1070 in Annex 1 of the January TSD, 500 euros is shown;

  5. January pay is disbursed in February – under code 1070 in Annex 1 of the February TSD, 500 euros is shown.

Thus, if December pay for a person with reduced work capacity was disbursed in January, under code 1070 in Annex 1 of the January TSD (deadline for filing a return: 10 February) there may be declared as a reduction that monthly rate on which the state paid social tax for December, thus not more than 470 euros. For the first time, 500 euros may be shown as a reduction under code 1070 for pay provided for January 2019 when it is disbursed.
 

12.04.2019