The provision of taxi services is essentially business.
While doing business, a person has to decide whether to offer his or her services as a sole proprietor, through a company or by using an entrepreneur account.
Since 2019, for simplifying the taxation of services offered by one natural person to another (incl. income derived through a taxi service platform), it is possible to use an entrepreneur account. It is possible to open an entrepreneur account in a bank (LHV) offering the entrepreneur 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 returns, 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.
You can find out more about an entrepreneur account on the webpage "Entrepreneur Account for natural person".
Sole proprietors (FIE) may deduct business related expenses from their business income. From their profit they have to pay income tax and social tax, and also contributions to mandatory funded pension in case they have joined the mandatory funded pension system.
A sole proprietor registered as a person liable to value added tax (VAT), has to pay VAT. The VAT 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.
The 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, 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.
Private limited company
When performing business activities through a private limited company (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 or 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.
Drivers who are private individuals and do very few occasional drives in an extent which cannot be considered to be a business, have to declare their earned income in the income tax return under the heading “Other income on which income tax has not been withheld” and have to pay the income tax themselves. The drivers who are private individuals and for whom this income is occasional, do not have to pay any other tax. The amount to be declared is the received sum for drives or for the driver's services, the costs of which (for example, a service fee on Uber, Bolt or any other ride-sharing platform, fuel, car repair, tires and so on) are not deductible.
Summaries of rides
If using the taxi service was related to performing the passenger´s (an employee) work tasks, the cost can be reimbursed to the employee by the employer on the basis of a ride summary issued by the ride-sharing platform as the expense in the benefit of another person and supported by documentary evidence pursuant to subsection 12 (3) of the Income Tax Act. This is the case regardless of whether the taxi service was provided by a sole proprietor, private limited company, owner of an entrepreneur account or by a private individual.