Taxation of a driver’s income depends on whether the activity is occasional or done regularly to receive income.
Drivers (natural persons) who ride occasionally have to declare their earned income in the income tax return in subdivision “Other income on which income tax is not withheld” and pay income tax. Other taxes are not added to drivers’ (natural persons) income who make occasional single rides. The amount received for a ride or a driver service has to be declared and expenses cannot be deducted (for example, service fees of Uber, Taxify or any other ride-sharing service platform; fuel, repairs, tires etc.).
In case the service provided by a driver (natural person) to a passenger was related to the passenger’s work assignments, the passenger’s employer can compensate this expense according to a ride summary issued by the ride-sharing platform as compensation for certified expenses incurred for the benefit of another person (Income Tax Act § 12 (3)).
For simplifying the taxation of services offered by one natural person to another (incl. income derived through a ride-sharing service platform) in year 2018 it is possible to use a business account in a credit institution, because the Simplified Taxation of Business Income Act enters into force. It is possible to open an account in a bank offering the special business account service and to transfer income to this account. The bank will reserve a fixed percentage of the received amount automatically to cover taxes and transfers it to the Estonian Tax and Customs Board. Tax rate is 20% if the annual receipt is up to 25,000 euros and 40% if the annual receipt exceeds 25,000 euros. The tax on business income will cover income tax, social tax and contributions to mandatory funded pension. The stated tax rate takes into account the estimated expenses which may be related to offering a service. The natural person does not have the obligation to submit tax declarations, register as an entrepreneur or keep records of expenses.
It is convenient for a natural person to use the business account when earning occasional (business) income, because it also covers social tax and contributions to mandatory funded pension and therefore increases contributions to the II pension pillar. Income transferred to the business account will be taken into account when calculating compensations related to social tax.
Until business accounts can be opened in banks, the driver’s occasional income on providing ride-sharing services through a ride-sharing platform will be taxed on his/her income tax return.
A natural person who offered occasionally rides, earned 100 euros per month over a period of three months, 150 euros per month over a period of five months and 200 euros per month over a period of four months. Thus, the natural person who offered occasionally rides earned a total of 1850 euros:
3 × 100 = 300 euros
5 × 150 = 750 euros
4 × 200 = 800 euros
Total: 1850 euros
At the same time, the natural person was employed under an employment contract and his/her gross monthly salary was 450 euros per month (the gross salary is the salary before the deduction of the income tax, unemployment insurance premium and mandatory funded pension). Thus, the natural person earned a gross annual salary total in the amount of 5400 euros. The natural person had submitted to the employer an application to apply the basic exemption (500 euros).
The Estonian Tax and Customs Board pre-fills the income tax return for 2018 (the deadline for submission is 1 April 2019):
- in table 5.1 – the salary in the amount 5400 euros and the withheld income tax 0 euros (the basic exemption was applied), and
- in table 9.1 – the withheld unemployment insurance premium (1,6%) in the amount of 86,40 euros and the mandatory funded pension payment (2%) in the amount of 108 euros.
The natural person must himself/herself add in table 5.6 the income from the occasional riding services in the amount of 1850 euros.
The natural person´s taxes will be calculated according to the income tax return for 2018:
- the basic exemption will be calculated by summing up all annual income, i.e. 5400 + 1850 = 7250 euros.
If the annual income is less than 14 400 euros, then the natural person’s basic exemption is 6000 euros. In this example, the natural person’s annual income is less than 14 400 euros and that means that the amount of basic exemption is 6000 euros.
- the income tax obligation is calculated as follows:
(annual income – basic exemption – unemployment insurance premium – funded pension) × 20% income tax or
(7250 – 6000 – 86,40 – 108) × 20% = 1055,60 × 20% = 211,12 euros;
- the income tax obligation is compared with the income tax paid by the natural person during the year. In this example, the natural person has used during the year 2018 the basic exemption and has not paid the income tax in the year 2018. It means that based on the income tax return for 2018, the person must pay to 1 July 2019 the income tax in the amount of 211,12 euros.
The income of drivers who provide services regularly is considered business income and they have to register in the Commercial Register as a sole proprietor or establish a private limited company.
Sole proprietors may deduct business related expenses from their business income. From their profit they have to pay income tax and social tax and in case they have joined the mandatory funded pension system then also contributions to mandatory funded pension.
A sole proprietor registered value added tax (VAT) liable, has to pay VAT. Value added tax return (form KMD) has to be submitted every month.
A sole proprietor cannot distribute dividends and does not have to file an annual report to the Commercial Register.
Sole proprietor’s business income has to be declared on the form E of the income tax return. The income tax return and form E have to be submitted once a year with the person’s other income and deductions by 31 March of the year following the period of taxation. A sole proprietor has cash based accounting which means that income and expenses have to be indicated in the accounting for taxation purposes in the year money is paid or received.
If a sole proprietor wishes to save up for a bigger investment then he or she may use a special account to defer tax obligations.
Sole proprietors have to take into account the obligation to pay advanced payments.
More instructions about sole proprietors’ tax obligations here: "Sole proprietor’s ABC“ (in Estonian).
When performing business activities through a private limited company (osaühing, OÜ) it is necessary to consider that providing driver services is a business activity and labour taxes need to be paid on income from employment (income tax, social tax, unemployment insurance premiums and in case the driver has joined the mandatory funded pension system then also contributions to mandatory funded pension).
The owner of a private limited company may receive dividends as owner’s income in addition to salary. Distributing dividends requires only income tax to be paid.
In case of making taxable payments, the representatives of private limited companies need to submit monthly income tax declarations (form TSD, declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension) to the Estonian Tax and Customs Board and annual reports to the Commercial Register.
An obligation to register as value added tax (VAT) liable arises when the taxable supply exceeds 40,000 euros as calculated from the beginning of a calendar year. When the limit amount is reached the representative of the company has to submit an application to the Estonian Tax and Customs Board to register the company VAT liable. VAT return (form KMD) is submitted monthly.
The person providing driver services can decide on which business form (sole proprietor or private limited company) to use.
Regardless of the chosen form of business in Estonia, the Uber service of enabling the use of the application is registered as VAT liable in the Netherlands and is regulated in Estonia according to subsection 10 (5) of the Value-Added Tax Act. This means that by using the Uber application for offering ride-sharing services the Estonian entrepreneur (sole proprietor or private limited company) has to register as a taxable person with limited liability and this service has to be declared and VAT with the Estonian rate of 20% has to be paid (the so-called reverse charge).
As a VAT liable person with limited liability does not have the right to deduct the input VAT on purchased goods and services (incl. the VAT calculated from the purchase price of the reverse charged service), the driver offering services in the course of business activities can consider registering for VAT according to the standard procedure voluntarily before the VAT registration threshold limit is reached.