Expatriate tax - Estonia

Non-EU nationals, who are residing in Estonia based on residence permit are, in general, permitted to work in Estonia.

Non-EU nationals who are staying temporarily in Estonia are permitted to work in Estonia if:

• the right to work follows directly from a law or a treaty or
• their short-term employment has been previously registered by the employer in the Police and Border Guard Board.

Employers without a legal entity or a branch in Estonia must register as a non-resident employer at the Estonian Tax and Customs Board prior commencing activities in Estonia.

To work in Estonia, a non-EU national must hold a valid residence permit that entitles him/her to work.

An EU, EEA and Swiss national may reside and work in Estonia without registration of his/her right of temporary residence for a term of up to 3 months.
More information regarding working in Estonia can be found on Police and Border Guard webpage.

Grant Thornton Estonia can help with applying for visa and registering the short-term employment in Estonia, as well as with registering the right of residence for EU nationals in Estonia.

The tax year in Estonia is a calendar year.

The filing date for an individual’s tax return is 30 April following the year-end, tax payment date is 1 October.

Income tax is withheld by the employer on monthly basis; therefore, the filing obligation depends on whether the individual has received income during a tax year from which income tax has not been withheld (e.g. capital gain, rental income, income from foreign sources, etc.).

Tax return should be submitted also in case the individual wishes to use deductions which are not automatically applied.

Individuals are taxed with a flat income tax rate at 22%.

Tax residents of Estonia are taxed on worldwide income, whereas non-residents are taxed on Estonia source income only (e.g. employment performed in Estonia, income from real estate located in Estonia).

Generally, an individual is a tax resident of Estonia if he or she resides in Estonia or if she or he stays in Estonia for at least 183 days during a period of 12 consecutive months.

Treaty residency principles are applied in case double tax treaty is in place.

Taxable income from employment includes salaries, wages, bonuses, lump sum payments, allowances and other cash payments related to employment.

The employer is obliged to withhold income tax and report it together with social security contributions to the Estonian Tax and Customs Board on monthly basis.

Employment income is deemed to be sourced in the country in which the employment services are physically performed.

Director’s fees related to management of Estonian company are taxable in Estonia.

Employee fringe benefits are subject to fringe benefit tax (FBT). This tax is imposed on employers and is not reported as individual’s income. Common examples of benefits subject to FBT include accommodation, motor vehicles, catering, provision of services, goods or assets, including shares, free of charge or under market price.

Stock options are exempt from FBT in case the period between granting an option and transferring the underlying share to the employee is a least three years.

There are no specific concessions for expatriates in Estonia.

Double taxation is avoided either by exempting foreign income in Estonia (dividends and employment income under certain conditions) or crediting foreign tax against Estonian tax (up to 22%).

Double tax treaties may provide exemption instead of credit method.

Following deductions are available in Estonia:

• basic tax exemption depending on the amount of annual income (available if annual income is less than EUR 25,200)
• educational expenses of the individual and/or her dependents
• gifts and donations to listed non-profit organizations, foundations and religious associations
• payments to voluntary EEA pension funds up to 15% (and not more than EUR 6,000) of the taxable income
• unemployment insurance and II pillar pension fund contributions
  Training expenses and gifts and donations can be deducted in total up to EUR 1,200.

Income tax 22% is withheld after the deduction of basic exemption and employee’s social security contributions.

Income tax and social security contributions are reported by the employer to the Tax and Customs Board on monthly basis by 10th day following the salary payment.

Capital gains are taxed with 22% income tax.

Social security payments in Estonia are divided between the employer and employee as follows:

1.6% unemployment insurance and 2% pension fund contribution are withheld by the employer from the gross salary

33% social tax and 0.8% unemployment insurance contribution is paid by the employer

Pension fund contributions are applicable only for residents who have joined the II pillar pension fund scheme.

Share plans, including stock option plans fall under fringe benefit taxation rules. Taxable event arises when the shares are transferred to the employee free of charge or under market price.

Exemption from FBT applies in case the shares are acquired by the employee after three years as of the date of grant. Exemption applies also to stock options granted by another company belonging to the same group with the employer.

In order to apply the exemption, specific conditions must be met. Therefore, we strongly recommend consulting with Grant Thornton Estonia with regards to tax treatment of stock options as well as other share plans.

There are no other taxes on employment income.