Tax changes in Estonia in 2020 and 2021

The year 2020 has passed and it is time to take a look at the new year. What will 2021 bring to the world of taxes? Leinonen's advisers have prepared a brief overview of the most important tax changes, some of which were enforced in 2020 while others will become applicable in 2021.

Tax rates in 2021

There are no changes to the tax rates applicable in Estonia, which means that all tax rates applicable in 2020 will remain in force.

An overview of applicable tax rates (tax rates in Estonia as of 2021)

Payroll taxes

Payroll processors, however, should note that as of 1 January 2021, the monthly rate serving as a basis for the minimum social tax obligation is 584 euros instead of the current 540. Therefore, as of new year, the minimum social tax obligation is 192.72 euros per month and there is an obligation to check whether the person has joined the second pillar pension.

Pension reform

Second pillar pension becomes voluntary as of 1 January 2021. This means that those who had not joined the second pillar can now do so and all second pillar owners can suspend contributions or leave the pillar altogether and withdraw the money.

More information on the new options can be found here.

In relation to the changes to the second pillar pension, employers must take into consideration the increased administrative burden, as in the future, there is an obligation to regularly check whether a person has joined the second pillar pension.

Temporary work for the unemployed

Unemployed people were given the opportunity to engage in temporary work last year. As of 1 September 2020, people who have registered as unemployed can remain registered and engage in temporary work for up to eight days per month. This enables the unemployed to try a new profession or participate in short-term projects (e.g. to give lectures or write articles) without having to cancel their registration as unemployed.

Further information on the rules can be found here.

The one-off payment or total payment for temporary work must not exceed 233.60 euros.

Income Tax Act and Taxation Act

As of 1 January 2021, foreign temporary employment agencies that provide non-resident workers to Estonian companies must consider that they are obliged to pay tax in Estonia. Prior to 2021, it was possible for a situation to occur in terms of certain constructions, where an Estonian company rented non-resident employees from a foreign temporary employment agency who performed work in Estonia while no taxes were paid on their remuneration in Estonia or the foreign country. As a result, a tax amendment was adopted in order to avoid unfair competition between domestic and foreign labour force.

As of this year, taxation provisions related to the use of foreign temporary workers came into force, according to which, from the perspective of taxation, it is no longer important who pays the remuneration, but who, in economic terms, covers the labour costs related to working in Estonia. In other words, as the temporary employee's labour costs are covered by the Estonian user undertaking via a service fee invoice, the costs are borne by the temporary employment agency. Additionally, in such a case, the remuneration of a non-resident temporary employee working in Estonia must be taxed as of the day they commenced work in Estonia. Therefore, a non-resident company that offers temporary workforce or mediates temporary workers to an Estonian user undertaking for performing work in Estonia is obligated to:

1) register as a non-resident payroll tax payer with the Tax and Customs Board. Leinonen's advisers can register you on your behalf;

2) enter their employees who are going to work in Estonia, even for a short term, in the employment register;

3) withhold all labour taxes from remuneration and declare them as of the day of commencement of the work, i.e. the first day in Estonia. Upon the existence of an A1 social insurance certificate of another member state, the social tax and contributions of a non-resident employer and temporary worker do not have to be paid in Estonia.

Leinonen's accounting team can help you with both registering employees and future wage calculation.

What should Estonian companies who use the services of foreign temporary employment agencies bear in mind?

Earlier, it was planned for non-resident temporary employment agencies and resident user undertakings to be jointly and severally liable in terms of the tax obligation incurred in Estonia, but luckily this was abandoned. According to the law enforced, the user undertaking and the non-resident are not jointly and severally liable for meeting the obligation to withhold income tax, but the user undertaking has to check with the tax authority whether the non-resident temporary employment agency has fulfilled their obligation to register with the Tax and Customs Board. Failure to fulfil the checking obligation may be punishable with a fine of up to 32,000 euros.

Value-Added Tax Act

There are several cross-border trade-related amendments planned in terms of the Value-Added Tax Act as of 1 July 2021, more information on which can be found here (VAT changes as of 2021).

Excise duties

Excise duty on tobacco

From 1 December 2020 to 31 December 2022, tobacco liquid with and without nicotine is not regarded as an alternative tobacco product and is not taxed with the tobacco excise duty.

The applicable excise duty rates are available here.