In some other articles, we have mentioned that fringe benefits can trigger tax obligations. This article will explain what is considered under Estonian law as fringe benefits.
It is part of keeping your staff and yourself happy to offer certain perks or benefits, cover sports costs and organize company events. Also, if you go to client meetings or dinners then that incurs a cost for the company. Under Estonian rules, however, expenses which are also for the benefit of the employee almost always must be taxed as fringe benefits.
For the purposes of fringe benefit taxation, the concept of “employee” has a broad definition. In addition to employees working under the employment contract, it also includes management board members and immediate family members of employees and management board members. In addition, individuals providing services for more than 6 months as well as individuals working under other types of agreements provided by the Law of Obligations Act are considered employees for the purpose of fringe benefits taxation.
Technically fringe benefits are any goods, services or monetarily appraisable benefits which are given to an employee (as understood above) in connection with an employment or service relationship.
The law gives some examples of what should always be taxed as fringe benefits:
- full or partial covering of housing expenses;
- the use of a vehicle or other property of the employer free of charge or at a better price for activities not related to the employer’s business;
- payment of insurance premiums, unless such obligation is prescribed by law;
- compensation for use of a private car, in so far as it exceeds limits provided by law;
- loans granted with an interest rate below the market conditions, except if the interest at the moment of the payment is at least twice the interest rate last published under the Law of Obligations Act;
- transfer free of charge or sale or exchange at a price lower than the market price, of a thing, security, proprietary right or service;
- purchase of a thing, security, proprietary right or service at a price higher than the market price;
- waiver of a monetary claim, unless the estimated reasonable costs of collecting the monetary claim exceed the claimed amount;
- covering of expenses on formal education or in-service training for the purposes, except if these are directly related to employment and service relationship and functions of a member of the management board of a legal person.
Travelling expenses must be business-related and properly documented to avoid triggering tax. If it can be established that an employee or director benefitted and the trip was not business-related or only partly so, then in addition to corporate income tax being to on the respective portion, if taxed as fringe benefits, 33% social tax charge is also due at the level of the company regardless of the person’s residence. Sports and health advancement costs can be made tax-exempt up to a certain threshold. In certain instances, accommodation and transportation costs may also be excluded from fringe benefits’ taxation. Share option programs have specific rules to allow for exemptions.
If you have declared and taxed costs as fringe benefits or taxed any payments under other provisions of the Income Tax Act, then there is no need to report these a second time as non-business related expenses. Make sure to keep documented proof of purchased services, assets or fulfilled obligations being necessary for maintaining or developing business activities.
Example of taxation of fringe benefits
Price of fringe benefit (for example a restaurant dinner) 100 euros
Income tax 25 euros = 100 x 20/80
Social tax 41.25 euros = (100 + 25) x 33%
A total cost to employer is 166.25 euros = 100 + 25 + 41.25
You can find more information on that subject at the website of the Estonian Tax and Customs Board. If you have any questions or doubts, consult with your accountant or contact the Estonian tax office by email@example.com.
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. Download the full version of the Business Guide.
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.