Estonia – Tax, Unemployment Insurance, and Foreign National Employment Registration Developments

Estonia – Tax, Unemployment Insurance, and Foreig...

Recent developments in Estonia include new registration rules for resident/nonresident foreign individuals working in Estonia and a modification to the flat tax rate for individuals and the unemployment insurance rate, as well as changes to the taxation of directors’ fees paid to nonresident board members.

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In this Flash Alert, we briefly describe some recent developments in Estonia that may concern globally mobile employees and their multinational employers, including new registration rules for resident/nonresident foreign individuals working in Estonia and revised rates for personal income tax and unemployment insurance, as well as changes to the taxation of nonresident members of boards of directors.

Why This Matters

The changes described in this newsletter will impact employers and their employees (including those on international assignment) by helping to: streamline administration, reduce processing times, provide for more accurate record-keeping, and lower tax costs in respect of assignees to/in Estonia and Estonian assignees overseas who remain subject to tax in Estonia.

There are some new registration procedures that employers need to be aware of. If an employer is non-compliant, it may be subject to financial penalties and other sanctions.

Lower Income Tax and Unemployment Insurance Charge

Lowered Rate for Income Tax

As of 1 January 2015, the personal flat income tax rate in Estonia will be lowered to 20 percent (from 21 percent) for natural persons and the annual basic exemption (non-taxable amount) per year is set at EUR 1,848 (was EUR 1,728) and per month EUR 154.1

Changes to Taxation of Directors´ Fees

From 1 January 2015, directors´ fees paid to nonresident board members of Estonian companies will be taxable in Estonia at a rate of 20 percent. Fees are taxable even if the payer is not a resident legal entity or has a permanent establishment (PE) in Estonia (until 31 December 2014, fees are taxable in Estonia only when the payor is an Estonian resident legal entity or a PE in Estonia).

 

KPMG Note

The purpose of this change is to make directors´ fees paid to an Estonian company board member taxable in Estonia, regardless of whether these fees are paid by a resident or nonresident person. The scope of this taxation concerns the fees paid for carrying out directors´ duties for an Estonian company or PE, irrespective of where the duties are performed. Benefits provided to board members of Estonian companies or nonresident PEs are also taxable.2

Due to the payment of these fees, a nonresident board member may become liable for not only personal income tax, but also social tax on the employer´s behalf in Estonia. To fulfill a nonresident´s tax obligations relating to directors´ fees, the payor of these fees should register as a nonresident employer with the Estonian Tax and Customs Board, so as to be able to withhold taxes from the payments.

Lowered Rates for Unemployment Insurance Premium

As of January 1, 2015, unemployment insurance premium rates for insured persons (including an employee or a natural person providing services on the basis of a contract under the law of obligations) will be 1.6 percent, and for employers, 0.8 percent (in 2014, respectively 2 percent and 1 percent). The unemployment insurance premium rates are fixed and will remain the same until 2018.3

The unemployment insurance premium is paid on wages, salaries, and other remuneration paid to insured persons by their employers (irrespective of the tax residency of the employee) if the work is carried out in Estonia.

 

New Steps Regarding Registration of Employees and Social Security Coverage

New Obligations for Registering Employment in Estonia in Register of Employment as of 1 July 2014

As of 1 July 2014, all employment of resident and nonresident individuals whose work triggers a tax liability in Estonia must be registered in the official employment register. (The tax liability includes personal income tax and social security contributions.) The registration requirement exists irrespective of the form or presence of a contract and is solely the employer´s obligation.4

Introducing Strict Deadlines for Registration of Employment and Employee Termination

Commencement of the employment must be recorded at the latest by the time an employee commences the work, which means directly before starting the actual work.

Please note that currently there is no possibility to pre-register the individual’s employment. In addition, registering the employment after the actual work has commenced is prohibited. The Estonian tax authorities may impose penalties of up to EUR 3,300 in cases where the employer violates the requirements to register the employment as prescribed by legislation.

Employers have up to 10 calendar days as of the day of the worker’s suspension or termination of his or her employment to record that suspension or termination of the employment in the employment register managed by the Estonian Tax and Customs Board.

Applying for Estonian Personal Identification Codes for Foreign Nationals

A key factor in the registration of an individual’s employment is the acquisitions/assignment of an Estonian personal identification code – the foreign national needs to apply for an identification code before commencing the work, which means directly before starting the work.

The Estonian personal identification code – part of the process of registering individuals’ employment – can be obtained by the foreign national at the closest county government office in Estonia. He or she can:

  • go there in person to apply for/obtain the personal identification code; or
  • submit the application in person with the foreign mission of Estonia in a foreign state.

Applying for Social Security Coverage for Working in Estonia Via the Employment Register

Since 1 July 2014, employers are no longer required to: (1) apply for social security coverage for employees working in Estonia, and (2) submit the data on the employed persons to the Estonian Health Insurance Fund. The employees´ health insurance data will be delivered automatically from the employment register along with proof of registration.

 

KPMG Note

This should help streamline administration and save time for employers and employees.

Footnotes

1 Maksukorralduse seadus (Taxation Act) Available in Estonian at:https://www.riigiteataja.ee/akt/116042014013#jg4  (as of 1 June 2014). Available in English at:https://www.riigiteataja.ee/en/eli/ee/531032014006/consolide  (as of 30 June 2014).

2 Tulumaksuseadus (Income Tax Act) Available in Estonian at:https://www.riigiteataja.ee/akt/111072014023  (as of 1 January 2015). 

3 Töötuskindlustuse seadus (Unemployment Insurance Act) Available in Estonian at: https://www.riigiteataja.ee/akt/116042014029  (as of 1 July 2014). Available in English at: https://www.riigiteataja.ee/en/eli/509072014020/consolide  (as of 1 July 2014).

4 Tulumaksuseadus (Income Tax Act) Available in Estonian at:https://www.riigiteataja.ee/akt/111072014023  (as of 1 January 2015).

Please note that for registration purposes, in general, all legal and natural persons engaging individuals who perform work for such persons – such as a resident or nonresident legal person (including branch, permanent establishment, etc.) in Estonia, Estonian state or local government authorities, a natural person, or a self-employed person – are considered employers. Furthermore, individuals working on a voluntary or independent basis in/for a company or as a ‟self-employed” individual (i.e., they are receiving no remuneration for their work) who otherwise would be subject to taxation must also be recorded in the employment register.

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Estonia:

 

Joel Zernask (tel. +372 6 268 791; e-mail: jzernask@kpmg.com)

Regina Valge (tel. +372 6 268 700; e-mail: rvalge@kpmg.com)

Eveli Stahelstrauch (tel. +372 6 268 700; e-mail: estahelstrauch@kpmg.com)

*     *     *     *

 

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Estonia:

* Joel Zernask (tel. +372 6 268 791; e-mail: jzernask@kpmg.com)

* Regina Valge (tel. +372 6 268 700; e-mail: rvalge@kpmg.com)

* Eveli Stahelstrauch (tel. +372 6 268 700; e-mail: estahelstrauch@kpmg.com)

The information contained in this newsletter was submitted by the KPMG International member firm in Estonia. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2014 KPMG Baltics OÜ, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

*     *     *     *

 

For additional information or assistance, please contact your local GMS or People Services professional or one of the following professionals with the KPMG International member firm in Estonia:

* Joel Zernask (tel. +372 6 268 791; e-mail: jzernask@kpmg.com)

* Regina Valge (tel. +372 6 268 700; e-mail: rvalge@kpmg.com)

* Eveli Stahelstrauch (tel. +372 6 268 700; e-mail: estahelstrauch@kpmg.com)

The information contained in this newsletter was submitted by the KPMG International member firm in Estonia. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2014 KPMG Baltics OÜ, a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Printed in the U.S.A. The KPMG name, logo and “cutting through complexity” are registered trademarks or trademarks of KPMG International.

The information contained in this newsletter was submitted by the KPMG International member firm in Estonia. The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.

© 2016 KPMG Baltics OÜ, an Estonian limited liability company and a member firm of the KPMG network of independent member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

Flash Alert is an Global Mobility Services publication of KPMG LLPs Washington National Tax practice. The KPMG logo and name are trademarks of KPMG International. KPMG International is a Swiss cooperative that serves as a coordinating entity for a network of independent member firms. KPMG International provides no audit or other client services. Such services are provided solely by member firms in their respective geographic areas. KPMG International and its member firms are legally distinct and separate entities. They are not and nothing contained herein shall be construed to place these entities in the relationship of parents, subsidiaries, agents, partners, or joint venturers. No member firm has any authority (actual, apparent, implied or otherwise) to obligate or bind KPMG International or any member firm in any manner whatsoever. The information contained in herein is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavor to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act on such information without appropriate professional advice after a thorough examination of the particular situation.

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