Changes in law 2018

Tax-free income

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.

Accounting for the annual income of a natural person

There is also a change in annual income accounting.

• The following income taxable under the income tax is counted as annual income: salary and other remuneration, service charges received under a contract under the law of obligations, dividends, lease and rental income, profits from the transfer of property, royalties, interest, business income, taxable pension, subsidy, scholarship, bonus, compensation or other income.
• Dividends received from an Estonian company, which are already taxable at company level.
• Annual income also includes salary, dividends and other income received abroad and not subject to income tax in Estonia.
• The amount taxed on the basis of the Simplified Taxation of Business Income Act, where business income tax has been reduced by social tax (reference: business account).

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).

Obligation to declare loans

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 Estonian Banks statistics database which you can find from the following page:
Estonian Banks statistics database

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.

Sports expenses are partially tax-free

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:

• participation fee for public sports events;
• expenditure directly related to the regular use of sporting and exercise facilities;
• expenditure for maintaining the employer's existing sports facilities;
• expenditure on services provided by a rehabilitation therapist, physiotherapist, occupational therapist, clinical speech therapist or clinical psychologist;
• health insurance premiums.

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.

Use of a car for private purposes

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.

Compensation for incapacity for work for the 2nd and 3rd day of sick leave

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.

Parking fee compensation

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.