Below are some of the most common questions on tax obligations in relation to recruiting foreign employees.
What happens to an employee’s tax residency? Which country has the right to tax employment income? Which rates are applicable? What happens to pension funds or social security payments?
As the regulations for different cases vary, always consult with the Estonian Tax and Customs Board – or with other experienced consultants operating in the private sector – before international recruitment in order to avoid any tax risks.
General principles of payroll taxation
In general, there is no difference in taxation rates when you employ an Estonian or a foreigner. Differences in taxation of employment income may arise only because of the employee´s tax residency and the tax deductions available.
What to consider?
1) Ask/think whether your employee will become a tax resident. (Do not confuse this with residency from a geographical point-of-view, immigration point-of-view or with e-residency.)
2) If the employee does not become a tax resident – consider the social security related matters involved (Certificate A1).
Avoiding double taxation
Currently, Estonia has 56 double-taxation avoidance agreements (tax treaties) with other countries. A tax treaty sets the limits for taxation between two countries and helps to avoid the (possible creation of) double tax-residency for the foreign employee.
When your employee comes from a country with whom Estonia has signed a tax treaty, you must take into account the provisions of the tax treaty together with the countries’ internal tax legislations, when considering whether the tax residency of your employee could change.
Foreign employee’s tax residency
According to the Estonian Income Tax Act, an individual is considered an Estonian tax resident if one of the following criteria is met:
- Their place of residence is in Estonia or
- They stay in Estonia for at least 183 days over a period of 12 consecutive calendar months.
Fulfilling only one of these conditions is enough to be a tax resident in Estonia.
In general, an employee working in Estonia for a short term (fewer than 183 calendar days over a period of 12 consecutive months) will not be considered a tax resident of Estonia. However, if the period of working exceeds more than 183 calendar days, the foreign employee will, most likely, be considered a tax resident.
Take note: as an employer, you have to calculate, withhold and transfer payroll-related taxes to the Estonian tax authorities on a monthly basis by the 10th of every month, following the month of payment. The non-tax resident employee payroll data is submitted to the tax authorities on TSD Annex 2, while for a tax resident employee it’s filed on TSD Annex 1.
Registering a foreign employee as a tax resident in Estonia
When your foreign employee fulfils the criteria for tax residency in Estonia, remind the employee that they should submit the application form for determination of residence (Form R).
Be aware that depending upon the circumstances, it’s also possible that an employee may be considered a tax resident for one part of the tax year and a non-resident for the other part.
In order to notify the Estonian tax authorities of any circumstances related to changing the person’s tax residency, the employee must submit the application form for determination of tax residency (Form R) to the Estonian Tax and Customs Board. A person will be considered a resident for tax purposes as of the date of his or her arrival in Estonia until the date of departure.
The (either traditionally or digitally) signed application should be sent to firstname.lastname@example.org, or by registered post or personally taken to the address:
Maksu- ja Tolliamet (Estonian Tax and Customs Board)
Lõõtsa 8a, Tallinn 15176
Service times at the tax office are Monday to Thursday, 8:30am to 4:30pm and Friday, 8:30am to 3:30pm.
There is an excellent tool available for the employers to easily check an employee’s tax-residency on the Estonian Tax and Customs Board website (Mitteresidentsuse kontrollimine).
If an employee does NOT become an Estonian tax resident
The monthly salary paid to the non-tax-resident employee for work performed in Estonia is taxed with following taxes:
From the employee’s side:
- Personal income tax at the rate of 20% (withheld by the employer)
- Unemployment insurance premium at the rate of 1.6% (withheld by the employer)
From the employer´s side:
- Unemployment insurance premium at the rate of 0.8% (payable by the employer)
- Social tax at the rate of 33% (payable by the employer)
Take note #1: no monthly tax-exempted income is available for a non-tax resident employee. (For the tax resident employee, a monthly tax-exempted income at the amount of €170 is available.)
Take note #2: no mandatory pension contributions (Second Pillar contributions) are due from employment income for non-tax resident employees. As an employer, you have the option to make contributions on behalf of a non-tax resident employee to the voluntary pension fund (Third Pillar contributions).
If a non-tax resident employee becomes a tax resident later on, an individual born after 1 January, 1983 has to join the Estonian pension system and start contributing to the mandatory funded pension system. They may choose which suitable Second Pillar pension fund they would like to join. As an employer, you are still obliged to withhold obligatory funded pension payment at the rate of 2% from the employee`s gross salary to which the state adds 4%.
Take note #3: in case the person leaves Estonia and becomes a non-resident tax payer, the mandatory funded pension payments will be stopped. However, there is no possibility to withdraw the money upon leaving. According to the Estonian Funded Pension Act, a unit-holder of the pension fund shall be entitled to mandatory funded pension payment when the person has reached the pensionable age which is currently 63 years, but will react to 65 years of age by 2026.
Filing a personal income tax return in Estonia
Provide information and guidance about the personal income tax return matters to your foreign employees.
The tax year in Estonia follows the calendar year: January 1 to December 31.
- A tax-resident employee is subject to unlimited tax liability in Estonia; in other words, a resident employee is obliged to declare their worldwide income.
- A non-tax resident should pay income tax only on the income received from the Estonian sources. (A non-resident in Estonia has to submit an income tax return only in specific cases.)
Tax returns are usually pre-filled (except for income received from foreign sources) and submitted via the e-Tax Board’s website.
A foreign employee can now file a non-resident personal income tax return via e-Tax Board using their Estonian ID-card. In case of not having an Estonian ID-card, the income tax return must be submitted on paper (the tax authorities will not automatically issue a tax notice in this case).
Take note: it is your foreign employee’s responsibility to file their non-resident personal income-tax return in Estonia.
The deadline for submitting personal income tax returns for all tax payers – including both tax resident and non-tax resident employees – is March 31 of the year following the year of income received.
Currently, there is no possibility of extending the submission deadline. Depending upon the source of income, the due date for remitting the tax obligation is either July 1 or October 1. Every single taxpayer has a unique payer ID, which should be used each time upon making the payment to the Estonian tax authorities. You can find your employee´s reference number on the tax authority’s website.
Tax-resident employee´s tax return
An Estonian resident tax payer is required to submit a Personal Income Tax Return to the Tax and Customs Board by March 31 of the year following the period of taxation (e.g. for year 2016, by March 31, 2017).
There is no need to file tax return when the income tax is already withheld (e.g. the individual only has employment income from which taxes have already been deducted), and when the taxpayer does not have any deductions to claim.
A resident tax payer may deduct housing-loan interest, training expenses, gifts and donations up to €1200 (for the tax year 2015 the amount was € 1920), but not more than 50% of the their income during the same period of taxation.
The due date for paying taxes to the Estonian Tax and Customs Board is 1 July based on the income earned in Estonia and 1 October based on the income earned abroad.
Non tax-resident employee´s tax return
A non-resident has a limited tax liability in Estonia: only Estonian-source income is taxed in Estonia.
A non-resident in Estonia is required to submit an income-tax return only in the following cases: