Hiring employees

In this article, we will take you through some examples of how to employ Estonian tax residents and residents of other countries to work for your Estonian OÜ. If you have not yet, read first Labour relations in Estonia and Individual tax residency articles. 

Employing an Estonian tax resident

Consider hiring an Estonian tax resident to physically work in Estonia for your Estonian company. After negotiating the employment terms, as usual, there are only two steps to complete regarding taxes.

1. Register the new employee in the employment register, the latest on his/her first working day.

The employment register is maintained by the Tax Authorities. You can access the employment register online via e-tax system logging in to your Company’s profile with your e-residency card.

You must insert the general information about the employee – name, personal ID code, the beginning date of the employment, type of employment, place of employment, the position of the employee and date of termination of the contract (if applicable). Please remember to also de-register the employee when he/she no longer works for you.

2. Declare salary payments on the monthly combined corporate income and payroll tax return (called TSD in Estonia) and pay the taxes due.

The TSD return must be submitted and the calculated taxes paid by the 10th day of the month following the month when the salary payment was made.

Since the employee is an Estonian tax resident working in Estonia, all payroll taxes must be paid in Estonia.

The tax return is accessible via the e-tax system, where you need to report employee’s ID code, gross salary amount and whether the individual would like to make use of monthly deductions or not. Tax calculations are automatically made by the system itself.

Example for the calculation of payroll taxes

  The gross salary agreed with the employee is EUR 1,000 1,000
1) 1,6% employee’s unemployment insurance contribution -16
2) 2% mandatory funded pension contribution* -20
3) EUR 500 monthly tax-free income** -500
4) 20% personal income tax -92,8
  The employee receives net salary of EUR 871,2
5) 33% social tax calculated on top of the gross salary payable by employer 330
6) 0,8% employer’s unemployment insurance contribution 8
  The total cost born by employer is EUR 1,338  

* The mandatory funded pension is obligatory for those born in 1983 and later. Persons who were born between the years 1942 and 1982 had the option to voluntarily subscribe to the funded pension system. The right and obligation to pay the contributions arises on 1 January following the year when a person becomes 18 years old.

** The amount of tax-free income or the so-called basic exemption in Estonia depends on an individual’s total annual income, so it is different for everyone. The aim of the basic exemption is to reduce the tax base for personal income tax. The employer applies it based on the employee’s own application as the employer may not know about employee’s income from other sources. An employee makes the application according to the following brackets:

  • Average monthly income up to EUR 1,200 – basic exemption EUR 500 per month.
  • Average monthly income EUR 1,201-2,099 – basic exemption equals 500 - 0,55556 * (employee’s income 1,200).
  • Average monthly income more than EUR 2,100 – no basic exemption available

The amount of basic exemption can be changed during the year multiple times. For example, if the employee has received an automated notification from the Estonian Tax Authority that his/her used basic tax exemption is higher than his/her expected maximum basic exemption, the employee can submit a new application and change the amount the employer can deduct in the TSD return so as to avoid paying additional income tax upon submitting the annual personal income tax return.

 In the example above, the total payroll cost for the company is EUR 1,338. The total taxes payable amount to EUR 466.80 remitted to the state budget and the employee receives EUR 871.2 as a net salary.

The minimum monthly gross wage in 2019 is EUR 540 per month and EUR 3.21 per hour. The average monthly gross wage at the beginning of 2019 was EUR 1,396. Moreover, Statistics Estonia publishes overviews about average wages per economic activity. The latest one can be found here and from the same webpage, you are able to search for more detailed statistics about wage levels and other macroeconomic indicators.

Together with salary reporting, it is also necessary to report any fringe benefits given to the employee, but these are not personalized and do not affect the employee’s taxable income.

In general, fringe benefits are all non-monetary benefits, that the employer provides to the employee and employee benefits from them.

Employing a tax non-resident from EU, Iceland, Liechtenstein, Norway or Switzerland

You are hiring an Estonian tax non-resident from either an EU country, Iceland, Liechtenstein, Norway or Switzerland. The employee would continue working in his/her home country i.e. not in Estonia.

NB: No tax reporting or tax payment obligations should arise in Estonia. Both income and social tax would be payable in the employee’s country of residence.

However, please bear in mind to check the respective country’s (where the employee works and is resident in) domestic tax laws. It is likely that your Estonian company would have to register as a foreign employer and start paying payroll taxes in that country.

Main principles of social security in the EU

Individuals are covered by the social security system of one Member State at a time, therefore contributions are payable only in one country.

Usually, social tax is paid in the country where you work, unless you are on an assignment or working in the different Member States.

Now, consider hiring somebody who is not an Estonian tax resident, but is a citizen of the EU, Iceland, Liechtenstein, Norway or Switzerland and who is happy to start temporarily working from Estonia while still mainly living somewhere else.

It is good news that a European Economic Area (EEA) or Swiss citizen can work in Estonia for up to 3 months without registering the right of residence. After three months have passed, the individual must register his/her place of residence in the population register of Estonia to obtain the right of residence in Estonia. The right of temporary residence is given for five years with extension opportunities. The ID card can be applied from the Police and Border Guard Board. An ID card certifies the person’s right of temporary residence.

In case he becomes an Estonian tax resident, please see the compliance-related comments above for Scenario 1 - Employing an Estonian tax resident.

In case he remains a tax resident in another country, the following must be done. 

1.  Register the new employee in the employment register, the latest on his/her first working day.

You can access the employment register via e-tax system logging in with your e-residency card.

The general information about the employee needs to be filled – name, personal ID code, the beginning date of the employment, type of employment, place of employment, the position of the employee and date of termination of the contract (if applicable). Please remember to terminate the employee registration when he/she no longer works for you.

Please note that the tax non-resident employee needs to have a non-resident number or an ID number for registering him/her in the employment register. This can be requested from the Tax and Customs Board. 

However, if it is already agreed in the beginning the employment relationship that the person will be working for more than 3 months, it is advisable that the individual registers his/her place of residence in the population register of Estonia before commencing work.

The application for an ID card can be submitted to the Police and Border Guard Board. This certifies the person’s right of temporary residence. Furthermore, an ID card gives the opportunity, for example, to digitally sign documents and access electronic services. More information from the Police and Border Guard Board

2. Declare salary payments on the monthly corporate income- and payroll taxes return (called “TSD” in Estonia) and pay the taxes due.

Since the non-resident is physically working in Estonia and the salary payment is made by an Estonian resident company (your company established in Estonia), the income tax is payable in Estonia.

As the place of work is in Estonia and no exemption applies i.e. this is not an assignment nor working in different member states, the social tax is also payable in Estonia. To avoid paying double social security contributions in Estonia and in the country of residence, the exact position of the non-resident should be analysed in detail.

The tax return is accessible via the e-tax system, where you need to report employee ID code and gross salary amount. Tax calculations are made by the system itself. However, please remember that non-residents are reported in a different annex of the TSD as residents.

Example of the calculation of payroll taxes

  The gross salary agreed with the employee is EUR 1,000 1,000
1) 1,6% employee’s unemployment insurance contribution -16
2) 20% personal income tax -196,8
  Employee receives net salary of EUR 787,20
3) 33% social tax calculated on top of the gross salary payable by employer 330
4) 0.8% employer's unemployment insurance contribution 8

Tax-free income usually cannot be taken into account when making salary payments to tax non-residents. Also, the mandatory funded pension payments are not obligatory.

Tax non-residents can later apply for basic exemption via their annual personal income tax return.

In the example above, the total cost for the company is EUR 1,338. The total tax amount of EUR 550,80 is remitted to the state budget and the employee receives EUR 787,20 as net salary.

Together with salary reporting, it is also necessary to report any fringe benefits provided to the employee. In general, the fringe benefits are all non-monetary benefits, that the employer provides to the employee and employee benefits from them.

Employing tax non-resident from a third country

You are hiring an Estonian tax non-resident from a third country. The employee would continue working in his/her home country i.e. not in Estonia.

NB: No tax reporting or tax payment obligations in Estonia. Both income and social tax would be payable in the employee’s country of residence.

However, please bear in mind to check the respective country’s (where the employee works and is resident in) domestic tax laws. It is likely that your Estonian company would have to register as a foreign employer and start paying payroll taxes in that country.

However, if you are hiring an Estonian tax non-resident from a third country to start working in Estonia, a number of aspects should be considered for your employee to work in Estonia legally.  

1 - they need to have a legal right to temporarily stay in Estonia or to move to Estonia

2 - once they have a legal right to stay in Estonia temporarily, in the majority of cases, the employer, meaning you, must register short-term employment with the Police and Border Guard Board before the employment starts.

Non-resident may act as a member of the management or supervisory board of Estonian legal entity without the registration. 

Foreigners with residence permits, in general, have the right to work in Estonia. Working requirements are dependant on the specifics of the residence permit. 

3 - if the employee is staying in Estonia temporarily, it is necessary to apply for an ID code for him in order to register the employee in the employment register. This can be requested from the Tax and Customs Board unless the employee is already an Estonian e-resident in which case they have an ID code. 

Now the following steps apply after the employee has received the right to stay and work in Estonia. Let’s assume, that the individual's tax residency changes to Estonia. If the individual keeps his home tax residency (at least in the beginning) please follow the reporting rules set up in Scenario 2.

1. Register the new employee in the employment register, the latest on his/her first working day.

Same as under other scenarios, you can access the employment register via e-tax system logging in with your e-residency card.

The general information about the employee needs to be provided – name, personal ID code, the beginning date of the employment, type of employment, place of employment, the position of the employee and date of termination of the contract (if applicable). Please remember to also terminate the employee registration when he/she no longer works for you.

2. Report salary payments made to the employee on monthly income and social tax return (called TSD in Estonia), paying both income and social tax in Estonia.

Submitting tax returns and paying taxes by the 10th day of the month following the month during which the payment was made.

Since the individual is physically working in Estonia and the salary payment is made from Estonian resident company (your company established in Estonia), the income tax is payable in Estonia.

Since the place of work is in Estonia and assuming that no social tax treaty applies, the social tax is also payable in Estonia.

Example of the calculation of payroll taxes

  The gross salary agreed with the employee is EUR 1,000 1,000
1) 1,6% employee’s unemployment insurance contribution -16
2) 2% mandatory funded pension contribution* -20
3) EUR 500 monthly tax-free income** -500
4) 20% personal income tax -92,8
  The employee receives net salary of EUR 871,2
5) 33% social tax calculated on top of the gross salary payable by employer 330
6)  0,8% employer’s unemployment insurance contribution 8
  The total cost born by employer is EUR 1,338  

* The mandatory funded pension is obligatory for persons born in 1983 and later. Persons who were born between the years 1942 and 1982 had the option to voluntarily subscribe to the funded pension system. The right and obligation to pay the contributions arises on 1 January following the year when a person becomes 18 years old.

** The basic exemption can be applied according to the employee’s application. The employee makes the application according to the following brackets:

  • Average monthly income up to EUR 1,200 – basic exemption EUR 500 per month.
  • Average monthly income EUR 1,201-2,099 – basic exemption equals 500 – 0.55556* (employees income - 1,200).
  • Average monthly income more than EUR 2,100 – no basic exemption available

 

Conclusion - how income tax works?  

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This article is part of a Business Guide

This article is a part of larger set of guidelines that e-Residency project team has requested for you and that has been compiled in cooperation with AS PwC. The full version of the Business Guide will be available for download shortly. 

Articles in the Knowledge Base and the Business Guide are intended solely to provide general guidance on matters of interest for the personal use of the reader, who accepts full responsibility for its use. This information should not be used as a substitute for consultation with professional accounting, tax, legal or other competent advisers. 

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