From January 2019 a natural person has the opportunity to open an Entrepreneur Account in LHV Pank and fulfil his or her tax liability according to the Simplified Business Income Taxation Act.
Entrepreneur Account is intended to simplify the tax liability for the payments received for the provision of services from one natural person to another natural person or for the sale of goods to a natural or legal person.
An Entrepreneur Account owner sees all the received payments and tax calculation in the e-MTA (‘Registers and inqueries’ – ‘My inqueries’ – ‘Entrepreneurship account’).
If another state has the right to tax income received on the entrepreneur account, this income cannot be taxed in Estonia through the entrepreneur account.
A person who has opened an entrepreneur account is not obliged to register as an entrepreneur and to calculate revenues and expenses. The owner of the entrepreneur account cannot be a VAT payer or be acting as a self-employed person in the same or similar area of activity.
- What is the purpose of the entrepreneur account service?
- To whom an entrepreneur account is useful?
- To whom an entrepreneur account is not useful?
- How does the entrepreneur account service work?
- What is the business income tax rate?
- How does the tax liability differ between simplified taxation of business income and self-employed person?
- Does the natural person get health insurance if he or she is using an entrepreneur account?
- Can I make deductions in a natural person's income tax return from the revenue received on my entrepreneur account?
- How does taxation work when a service is provided to a resident company, non-profit association, foundation and religious association which is a legal person?
- How does an entrepreneur account differ from a current account?
- A mistaken incoming payment to an entrepreneur account
- When business income is subject to tax in another country
The entrepreneur account creates a new simple and affordable way of doing business. Accounting and tax reports are not required when using an entrepreneur account because the tax liability is calculated on the basis of the payments to the entrepreneur account. An entrepreneur account owner does not issue invoices because he or she is not an entrepreneur or accounting entity. An entrepreneur account owner can provide a services or sell goods by a verbal contract. However, if necessary he or she can also conclude a simple written contract containing relevant data on providing the service or selling the goods. A written expense document may also be a bank account statement, a payment terminal receipt or a cash receipt.
For example, a bank account statement (payment order) or a cash withdrawal receipt indicating the name, quantity, price and amount of the goods or services, is a perfectly suitable expense document for a legal person when making a transfer to an entrepreneur account.
LHV Bank also provides payment terminals to entrepreneur account holders (on payment by card). The payment terminal shall issue a receipt to which the name of the goods can be entered and it is a perfectly appropriate expense document as well.
Furthermore, if, for example, an entrepreneur account owner sells self-produced handicraft to a legal person at a fair or marketplace, the expense receipt suitable for the legal person is a cash withdrawal receipt containing the date, details of the seller and buyer, the name, quantity and price of goods. If an entrepreneur account owner receives cash when providing a service or selling goods, he or she will transfer the money to his or her entrepreneur account to fulfil his or her tax liability.
Since in the case of legal persons the documentation of business transactions and the flow and preservation of source documents are governed by the accounting policies and procedures, the requirements may differ, but the Estonian Tax and Customs Board accepts simplified documents in the case of the entrepreneur account.
An entrepreneur account is useful for a person who provides services to other natural persons in the areas of activity that do not involve any direct expenses, or for a person who sells self-produced goods or handicraft goods or the goods with low costs of materials or acquisition.
Examples include baby-sitting, housekeeping, gardening, repair or construction services that do not involve direct costs or in which a customer pays for the costs. For example, a customer orders the repair or construction service and has bought the tools and materials for the repair himself or herself.
An example would also be the sale of self-produced goods to natural persons as well as to legal persons if the cost of raw material or source material is low compared to the selling price of the goods. For example, the sale of handicraft and art, or the sale of food, plants etc. grown or produced by the natural person.
An entrepreneur account is also an appropriate solution for new forms of entrepreneurship, such as the payments received from the provision of services from one natural person to another natural person through ride-sharing service platforms, e.g., Uber, Taxify, Bolt, etc.
Since the total amount received on the entrepreneur account (not only the profit from the provision of the services or the sale of the goods) is taxed with business income tax, it is not possible to deduct costs or expenses. Therefore, in the areas of activity that involve direct or high costs, it is more beneficial to operate as a self-employed person or through a company. For example, it is important to deduct the acquisition costs of the goods from the income when selling goods or providing intermediation.
- A natural person opens an entrepreneur account in LHV Pank.
To conclude the entrepreneur account agreement, the person must already be a customer of LHV Pank.
The customer of LHV Pank has to enter the LHV internet bank, select from the menu ‘Information and Settings’, select the page ‘Agreements’ and on the row ‘Entrepreneurship Account’ click ‘Sign agreement’. The agreement can be signed with Smart-ID, Mobile-ID or an ID card. It is important to review the terms and conditions of the entrepreneur account before signing the agreement!
By signing the agreement, the entrepreneur account owner will give arrangement LHV Pank to reserve business income tax from the total amounts received on the entrepreneur account and transfer the business income tax to the Estonian Tax and Customs Board.
- LHV Pank informs the Estonian Tax and Customs Board of the details of the person who has opened or closed the entrepreneur account and of the number of the entrepreneur account (IBAN), and immediately transfers the business income tax reserved from the total amounts received on the account within a calendar month to the Estonian Tax and Customs Board. The free money on the entrepreneur account can be used by the account owner in the same way as on a regular current account.
- Estonian Tax and Customs Board:
- transfers the taxpayer's data received from LHV Pank upon the conclusion of the agreement of opening the entrepreneur account into the register of taxable persons and deletes the taxpayer's data from the register upon the end of the term of the entrepreneur account agreement;
distributes the received business income tax if the taxpayer is an obligated person required to make contributions to a mandatory funded pension:
income tax rate of 20/55 of the business income tax rate,
social tax rate of 33/55 of the business income tax rate,
mandatory funded pension contribution rate of 2/55 of the business income tax rate;
distributes the received business income tax if the taxpayer is not an obligated person required to make contributions to a mandatory funded pension:
income tax rate of 20/53 of the business income tax rate,
social tax rate of 33/53 of the business income tax rate;
- forwards the data of the mandatory funded pension contribution to the registrar of the pension register and the social tax data to the Estonian Health Insurance Fund and the Estonian Social Insurance Board.
The business income tax rate is 20% of the total amount received on the entrepreneur account if the amount does not exceed 25,000 euros per calendar year and 40% of the amount exceeding 25,000 euros received on the entrepreneur account per calendar year.
If the amount received on the entrepreneur account exceeds 40,000 euros per calendar year, the natural person is obligated to register as an entrepreneur (FIE, OÜ) in the Commercial Register and as a person liable to value added tax in the Estonian Tax and Customs Board. The entrepreneur is required to keep accounts and accounts for taxation purposes.
How does the tax liability differ between simplified taxation of business income and self-employed person?
Pensioner Toomas provides a service with his personal tractor (ploughing, potato harvesting, snow clearing, etc.). He also has costs to keep the tractor running (repair, reserve parts, fuel, etc.).
Toomas receives 6,000 euros for his services in 2020 and spends 4,000 euros on costs.
If Toomas opens an entrepreneur account in LHV Pank and uses simplified taxation of business income, his business income tax liability is 1200 euros (6000 × 20%), since costs cannot be deducted from business income.
If Toomas registers in the Commercial Register as a self-employed person (FIE), he is allowed to deduct eligible expenses from business income.
In the income tax return form E, his business income before social tax correction is calculated: 6000 – 4000 = 2000 euros and after social tax correction it is 2000 ÷ 1.33 = 1503.76 euros.
Toomas' social tax liability as a self-employed person is 496.24 euros (1503.76 × 33%).
Toomas' income tax liability will arise on the natural person's income tax return.
Toomas' income consists of a pension of 4,800 euros and the business income as a self-employed person of 1,503.76 euros and a total of 6,303.76 euros.
Toomas has right to use basic exemption of 6,000 euros.
Toomas' taxable income is 6,303.76 – 6000 = 303.76 euros.
Toomas' income tax liability is 303.76 × 20% = 60.75 euros.
If Toomas provides services with a tractor as a self-employed person, his 2019 tax liability is 556.99 euros (496.24 + 60.75).
Thus if Toomas has costs (tractor repairs, reserve parts, fuel, etc.) in his business, his tax liability as a self-employed person is 643.01 euros (1200 – 556.99) smaller as using an entrepreneur account (simplified business income taxation).
An entrepreneur account owner has the right to receive health insurance benefiits if the received social tax in a calendar month is in the extent of at least the minimum social tax requirement. In 2021, the monthly rate of social tax is 584 euros and the minimum social tax obligation is 192.72 euros per month (584 × 33%).
In order to get health insurance, social tax in the extent of the minimum social tax requirement for the previous calendar month has to be received for the natural person. Health insurance begins on the following day after the receipt of social tax (10th day) and stops after one month if the minimum social tax obligation is not fulfilled by the 10th of the following month. Data on the person for whom the minimum social tax liability has been received, shall be submitted by the Estonian Tax and Customs Board to the Estonian Health Insurance Fund.
If a person is operating only through an entrepreneur account and has joined the second pension pillar, he or she must receive at least 1,606 euros per calendar month from the provision of services or sale of goods in 2021 in order to have health insurance. Of the 1,606 euros, business income tax constitutes 321.20 euros (1,606 × 20%) and social tax 192.72 euros (321.20 × 33/55 in case of a person required to make contributions to mandatory funded pension). If the minimum social tax obligation is fulfilled, the person has the right to receive health insurance benefits.
If a person is operating only through an entrepreneur account and has not joined the second pension pillar, he or she must receive at least 1548 euros per calendar month from the provision of services or sale of goods in 2021 in order to have health insurance. Of the 1548 euros, business income tax constitutes 309.60 euros (1548 × 20%) and social tax 192.72 euros (309.60 × 33/53). If the minimum social tax obligation is fulfilled, the person has the right to receive health insurance benefits.
You can read more about receiving health insurance on the webpage of the Estonian Health Insurance Fund "Working adults".
In February 2021, a natural person earned 400 euros under a service agreement (concluded with a legal person) and the legal person paid social tax 132 euros (400 × 33%). In February the natural person also received 800 euros on the entrepreneur account, from which the business income tax was 160 euros (800 × 20%) and social tax was 96 euros (160 × 33/55).
Thus, in February a total of 228 euros (132 + 96) of social tax was collected from the natural person. In this case the natural person´s minimum social tax obligation is fulfilled in February and he will get health insurance from 11 March.
Can I make deductions in a natural person's income tax return from the revenue received on my entrepreneur account?
Deductions in a natural person's income tax return from the revenue received on the entrepreneur account cannot be made (for example, tax-free income, mortgage interests, training costs). Also the income tax part of the business income tax is not included as paid or withheld income tax in the income tax return of a natural person.
At the same time, it is important to take into account that the sums received on the entrepreneur account, from which social tax part has been deducted, are taken into account as the annual income of the natural person and thus affect the amount of tax-free income of the natural person. The annual income and basic exemption are explained in more detail on the website “Tax-free income calculation”.
How does taxation work when a service is provided to a resident company, non-profit association, foundation and religious association which is a legal person?
An entrepreneur account owner can provide services and sell goods to both private persons persons as well as to companies, non-profit associations, foundations, legal persons in public law, state and local government authorities and other persons.
When providing a service to a resident company, non-profit association, foundation and religious association which is a legal person, it is only necessary to take into account the fact that these persons will be subject to additional income tax (rate 20/80), which equates the tax burden with the tax burden of a regular employment relationship. The additional tax liability of a legal person is intended to prevent the routine transfer of employment relationship to a more favourable entrepreneur account.
Therefore, in case of the service fee transferred to the entrepreneur account, it must be assessed who has received the service provided by the entrepreneur account holder, whether the employer (company) or the employee, and whether it may be the case of the employer's compensation of the expenses to the employee. It also needs to be assessed whether it may be the case of replacing the employer's employment contract or service contract to the use of an entrepreneur account.
If an employee has received the service and an employer compensates the employee the expenses related to the work tasks, it is exempt from tax under subsection 12 (3) of the Income Tax Act. For example, in a situation where an employee used the Bolt taxi service and the employer compensated the employee for the travel expenses related to work tasks, this is a compensation of expenses exempt from tax.
In case the taxi service provider was the owner of an entrepreneur account, the compensation of expenses of the taxi service does not give rise to any additional tax liability under Income Tax Act clause 34 13) and clause 51 (2) 1) to the employer (company).
However, if an employer replaces the employment contract or the service contract with the use of an entrepreneur account, then the company will incur an additional tax liability under the foregoing provisions. For example, in a situation where a company replaces the remuneration of a driver who has so far worked under an employment contract, through an entrepreneur account.
Thus, the company incurs an additional income tax liability (20/80) in a situation where an entrepreneur account replaces an employment contract, an authorisation agreement, a contract for services or another service contract under the law of obligations.
There is no additional income tax on the sale of the goods to the legal person.
Therefore, if a natural person receives amounts on the entrepreneur account that have been paid to a natural person from a resident company, non-profit association, foundation or religious association which is a legal person (hereinafter also ‘a payer’) for providing services and which are subject to taxation on the basis of the Simplified Business Income Taxation Act, these persons will be subject to additional income tax (rate 20/80) from expenses unrelated to business (subsection 34 (13) and clauses 51 1)–3) of the Income Tax Act).
An entrepreneur account owner is obligated to inform the payer of the fact that it provides the service through an entrepreneur account and that the service is taxable under the Simplified Business Income Taxation Act. Based on this, the payer knows that it is obligated to pay income tax on expenses not related to business (rate 20/80) and declare the paid amount in form TSD Annex 6, code 6080.
If the entrepreneur account owner does not report that he or she is providing the service through an entrepreneur account, the payer is obligated to tax the payment made to a natural person for the service with all labour (salary) taxes.
State and local government authorities, legal persons in public law and non-resident companies are not subject to tax liability on the basis of clause 51 (2) 1) of the Income Tax Act.
For the purposes of LHV Pank, the entrepreneur account is a regular current account for which the simplified rules for the taxation of business income apply. Similar rules apply to the entrepreneur account as a regular current account, for example a bank card or a card payment terminal can be ordered for the account, if desired. Investment services are an exception – securities transactions are not allowed in the entrepreneur account.
We recommend using another current account for a natural person´s daily operations that are not related to the Entrepreneur Account, to avoid erroneous tax payments to the Estonian Tax and Customs Board.
If a payment (for example, salary etc.) was mistakenly received on the entrepreneur account and it was taxed with business income tax, the taxpayer should submit an application through the e-MTA (‘Communication’ – ‘Correspondence’ – ‘Inquiries, certificates, applications’ or ‘Claims, liabilities, accounting’) with the details proving that the amount received was not subject to business income tax. If necessary, the application together with the evidence can also be submitted to the Estonian Tax and Customs Board in writing. The Estonian Tax and Customs Board returns the mistakenly paid tax to the taxpayer.
If another state has the right to tax the income received on the entrepreneur account, this income cannot be taxed in Estonia through the entrepreneur account, but in the income tax return as business income (form E) on the basis of general rules.
Another state may have the right to impose either:
- both income and social tax, in which case the income is not declared in Estonia;
- only social tax, when the entrepreneur account holder is socially insured in another country of the European Economic Area (the EU Member States, Norway, Liechtenstein, Switzerland) or in a social security agreement country (Canada, Ukraine, Australia, Belarus). In this case, taxes related to social security must be paid to that state, and in Estonia, only income tax must be declared and paid with an income tax return.
- only income tax, if a convention for the avoidance of double taxation and the prevention of fiscal evasion with respect to taxes on income and capital applies, but the person remains socially insured in Estonia. In this case, income tax has to be paid to another country, but social tax (and also the mandatory funded pension contributions) has to be paid to Estonia with the income tax return form E.
If income taxable in another country has been transferred to the entrepreneur account by mistake, you should contact the tax authority who can delete the amounts received incorrectly from the entrepreneur account accounting.
Proof of the obligation to pay income tax in another country requires the submission of a certificate issued by the tax authority of that state. The obligation to pay social security contributions in another country is certified by form A1.