From the new year, the tax-free income of all resident natural persons is EUR 6000 per year. This means that for a gross salary of EUR 1200, the tax-free income of a resident natural person is EUR 500 per month. Each increase of EUR 1.80 in the gross salary starting from EUR 1200 will reduce the tax-free income by EUR 1. In the case of gross salary of EUR 2100 per calendar month, the income tax-free minimum will be zero.
A special formula has been developed for the calculation of the income tax-free amount: 500 – 500 / 900 × (payment – 1200).
For example, if the gross salary is EUR 1800, the income tax-free minimum is EUR 166.67. The calculation is as follows: 500 – 500 / 900 * (1800 – 1200) = 166.67 EUR.
At the same time, the employee may also file an application stating that he wishes to exclude the income tax-free minimum, or exclude, for example, EUR 100 each month.
Annual salary recalculations take place once a year, bringing the entire year’s income together. This means that there may be an “overbalance” of the income tax free minimum, that is, the Tax and Customs Board will make a return on the basis of the income tax return for a natural person, but it may also turn out that an overpayment has been incurred and the employee has to return it himself.
For example, an employee receives a monthly gross salary of EUR 1000 each month with the income tax-free minimum of EUR 500 per month. Thus, his annual income totals EUR 12 000. If, for example, the same employee receives dividends of EUR 20 000 in this calendar year, his annual income will no longer be EUR 12 000, but EUR 32 000. The average monthly income will be EUR 2 666.67, for which the income tax-free minimum is 0 EUR, and not EUR 500. This means that the income tax return of a natural person requires the employee to reimburse the state that amount of income tax which he underpaid. Based on these figures, it is EUR 1200.
There is also a change in annual income accounting.
Tax-exempt compensations, grants and scholarships and other tax exemptions not declared in the income tax return of a natural person are not taken into account as annual income. For example, the sale of a dwelling or personal property (such as a car).
Pursuant to the amendment to the Income Tax Act, all loans granted to shareholders, partners or members of the company must be declared. The purpose of the amendment is to discover hidden profit distributions and to tax these.
Hidden profits can be referred to as unreasonably long-term loans, an unreasonable repayment schedule, a repeated extension of the repayment term, or a repeated increase in the amount of the loan, as well as irrational use of the loan. If the term of the loan is longer than 48 months, the tax authority may require proof of repayment ability and intent.
It is still important that these loans are given at an interest rate that is in line with market conditions. One possible basis for this is the Statistics Database of Eesti Pank, which can be found on the following page:
Eesti Panga statistika andmebaas
Loans must be declared quarterly; the first declaration must be submitted no later than 10.02.2018. It is important to note that the obligation to prove and declare applies to all loans granted from 01.07.2017 and also to loans where the loan amount is increased, the repayment term is extended or other essential terms are amended after this date.
In one quarter, an employer can reimburse an employee tax-free for sports expenses in the amount of EUR 100. It is a personal tax exemption that can not be passed on to other persons, nor can it be transferred from one quarter to another. Payment may be made once a year, but invoices must be drawn up at least quarterly. Payment is based on an invoice.
These expenses include:
This compensation does not include the purchase of sports equipment (including clothing, footwear) and the construction of new facilities. The exemption applies if the employer allows them for all employees. These compensations are to be declared once a year, using form INF 14.
If the company’s car is used for private purposes, it is a fringe benefit. From 01.01.2018, the basis for taxation is engine power, where 1 kW = EUR 1.96. Based on this amount, the fringe benefit taxes (income tax and social tax) on 1 kW are EUR 1.30 in total. Thus, in the case of a 100 kW passenger car, the fringe benefit is EUR 130 per month.
For cars that are more than 5 years old, a coefficient of 0.75 is used. Thus, in the case of a 100 kW passenger car over five years of age, the fringe benefit is EUR 97.50 per month.
It is not necessary to keep a diary for mixed use, but for a passenger car used entirely for work purposes, this is mandatory. In case of a passenger car used entirely for work purposes, it is also obligatory to make a corresponding entry in the Motor Vehicle Registration Centre (ARK); no state fee is charged for this entry. Information about whether the car is purely for work purposes or for mixed use is public.
If a passenger car used for work purposes becomes a mixed-use car, this proportion must be applied for at least one year.
There is no change in VAT.
The company has an obligation to pay compensation for incapacity for work to the employee for the 4th to 8th day, whereafter the Health Insurance Fund pays. From 01.01.2018, the employer has the opportunity to compensate for the 2nd and 3rd days of illness, withholding only income tax.
Income tax is not levied on a parking fee compensated to an employee in connection with the use of a private car in the performance of service, work or professional duties. An additional EUR 335 in parking fees may be paid income tax-free.
The transport costs of an employee under an employment contract between the place of residence and the workplace are exempted from the fringe benefit tax if the employee's place of residence is at least 50 km from the workplace or if the employer organizes employee transportation by bus or at least a two-seated vehicle.
The accommodation costs of an employee under an employment contract, if the employee's place of residence is at least 50 km from the workplace and the employee does not own immovable property usable as a residence closer to the workplace. An employee meeting these requirements can be accommodated tax-free in Tallinn and Tartu in the amount of EUR 200 per calendar month, and in other places of Estonia in the amount of EUR 100 per calendar month.
Fringe benefits do not include the costs incurred to provide a disabled employee with medical devices in the amount of 50% of the social tax paid on the employee during that year.
Until 30.06.2017, an employer of a minor (from 7 to 14 years old) was required to submit a separate document to the labor inspector applying for the latter's written permission, but starting from 01.07.2017, the employer must register the employment in the Employment Register at least 10 working days before the start of employment. The consent of the minor's legal representative, working conditions and information on whether the child has school obligations or not, must also be entered in the register.
Henceforth, if an employee realizes a share option, or acquires a part of the company before 3 years from the issuance of the option has expired, the employer does not have to pay fringe benefit tax on proceeds from the realization.
If realization takes place earlier, for example after 2 years, 1/3 is taxable and 2/3 are tax-free.
Fringe benefit tax does not have to be paid on realization of the option in case of sale of the whole company or the employee’s incapacity for work or death, either. If the option contract is not digitally signed or notarized, the employer must submit a copy of the contract to the Tax and Customs Board so that the date of the option can be monitored. The Tax and Customs Board must be notified within 5 working days.
Customer service at court registry and land registry departments is terminated from 01.07.2017. Henceforth, records and dossiers can be accessed at a notary's office or online using the e-service.
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