Law Changes 2018

Tax-free income

From the new year, the tax-free income for all resident natural persons is EUR 6,000 per year. This means that with a gross salary of EUR 1,200, the tax-free amount for a resident natural person is EUR 500 per month. Each EUR 1.8 increase in gross salary above EUR 1,200 reduces the tax-free amount by EUR 1. At EUR 2,100 gross salary per calendar month, the tax-free minimum reaches zero.

A special formula has been developed to calculate the tax-free amount: 500 – 500 / 900 × (payment – 1200).

For example, with a gross salary of EUR 1,800, the tax-free minimum is EUR 166.67. The calculation is as follows: 500 – 500 / 900 * (1800 – 1200) = EUR 166.67.

However, an employee may also submit an application stating that they do not wish to have the tax-free minimum applied or wish to apply, for example, EUR 100 each month.

The annual salary recalculation is done once a year when all income for the entire year is available. This means that the tax-free minimum may be exceeded, in which case the Tax and Customs Board will issue a refund through the natural person's income tax return, but it also means that an overpayment may have occurred and the employee must repay it themselves.

For example, an employee receives EUR 1,000 gross salary each month, for which the tax-free minimum is EUR 500 per month. This totals EUR 12,000 annual income. If the same employee also receives EUR 20,000 in dividends during that calendar year, their annual income is no longer EUR 12,000, but EUR 32,000. This averages to EUR 2,666.67 monthly income, for which the tax-free minimum was EUR 0, not EUR 500. This means that the employee must repay the portion of income tax they received in excess through their natural person's income tax return. With these numbers, that amount is EUR 1,200.

Annual income calculation for natural persons

There are also changes in annual income calculation.

• Annual income includes the following income subject to income tax: wages and other remuneration, service fees received under civil law contracts, dividends, rental income, capital gains from asset disposal, royalties, interest, business income, taxable pensions, benefits, scholarships, bonuses, compensation, or other income.
• Dividends received from Estonian companies that have already been taxed at the company level.
• Annual income also includes wages, dividends, and other income received abroad that is not subject to income tax in Estonia.
• Amounts taxed under the Simplified Business Income Taxation Act, reduced by the social tax portion of business income tax (reference: business account).

Annual income does not include tax-free benefits, allowances, and scholarships, as well as other tax exemptions that are not declared in the natural person's income tax return. For example, the sale of a residence or movable property for personal use (such as a car).

Loan declaration obligation

Due to amendments to the Income Tax Act, all loans granted to shareholders, partners, or members of a company must be declared. The purpose of the amendment is to detect and tax hidden profit distributions.

Hidden profit distributions may be indicated by loans granted for unreasonably long periods, unreasonable repayment schedules, repeated extensions of repayment deadlines or repeated increases in loan amounts, as well as irrational use of loan funds. If the loan term is longer than 48 months, the tax authority may require proof of repayment ability and intent.

It remains important that loans are granted at interest rates that correspond to market conditions. One possible basis is the Bank of Estonia statistics database, which can be found on the following page: Bank of Estonia statistics database

These loans must be declared quarterly, with the first declaration due by 10.02.2018. It is important to note that the obligation to prove and declare applies to all loans granted from 01.07.2017 onwards, as well as to loans where the loan amount is increased, the repayment deadline is extended, or other significant terms are changed after that date.

Sports expenses partially tax-free

Each quarter, an employer can reimburse an employee's sports expenses tax-free up to EUR 100. This is a personal tax exemption that cannot be transferred to other persons, and the amount cannot be carried over from one quarter to another. The payment may be made once a year, but invoices must be provided at least quarterly. The basis for payment is an invoice.

Such expenses include:

• participation fees for public recreational sports events;
• expenses directly related to regular use of sports and exercise facilities;
• expenses for maintaining the employer's existing sports facilities;
• expenses for rehabilitation physician, physiotherapist, occupational therapist, clinical speech therapist, or clinical psychologist services;
• health insurance contract premiums.

This benefit does not include the purchase of sports equipment (including clothing, footwear) or the construction of new facilities. The exemption applies if the employer provides these to all employees. These benefits must be declared once a year on INF 14.

Company car for personal use

If a company car is used for personal trips, it constitutes a fringe benefit. From 01.01.2018, the taxation basis is the car's kW, where 1 kW = EUR 1.96. Calculated from this amount, the fringe benefit taxes (income tax and social tax) per 1 kW total EUR 1.3. Thus, for a 100 kW car, the fringe benefit is EUR 130 per month.

For cars over 5 years old, a coefficient of 0.75 is applied. Thus, for a 100 kW car that is over five years old, the fringe benefit is EUR 97.50 per month.

For mixed use, no trip log is required, but for a car used 100% for business trips, it is mandatory. For a car used 100% for business trips, a corresponding note must also be made in the Road Administration, and no state fee is charged for this note. The information on whether a car is used 100% for business trips or for mixed use is public.

If a 100% business car becomes a mixed-use car, this proportion must be applied for at least one year.

There are no changes from the VAT perspective.

Sick leave compensation for days 2-3

The company is obligated to pay disability benefits to the employee from day 4 to day 8, after which the Health Insurance Fund pays. From 01.01.2018, the employer has the option to also compensate for sick days 2-3, withholding only income tax.

Parking fee reimbursement

Parking fees reimbursed to an employee in connection with using a personal car for service, work, or official duties are not subject to income tax. Parking fees can be paid tax-free in addition to the EUR 335 limit.