Previously, employers and employees often had to sign amendments to employment contracts to temporarily adjust working hours on a weekly or monthly basis. The new legislation gives the parties the option to adjust working time more flexibly and conveniently, without the need to formalize each change through a separate contract addendum. 

Requirements for Concluding a Flexible Working Time Agreement 

If the parties want to conclude a new employment contract or amend an existing one to introduce a flexible working time arrangement, the agreement must be in writing and include the following elements: 

• the agreed number of working hours; 
• the number of additional hours; 
• the minimum notice period for assigning additional hours; 
• information confirming that the employee has the right to refuse additional hours; 
• a clear statement that the employee must confirm acceptance of additional hours each time in a form that allows written reproduction (e.g., e‑mail). 

With Which Employees May Flexible Working Time Agreements Be Concluded? 

Such an agreement cannot be made with every employee. The law sets two mandatory conditions: 

1. the employee’s hourly wage must be at least 1.2 times the minimum wage established by the Government of the Republic; 
2. the agreed number of working hours must be at least 10 hours within a seven‑day period. 

Note: The flexible working time agreement may not remain valid under its original terms indefinitely. According to the Employment Contracts Act, if during the past six months an employee has, for the majority of the time, worked more than the agreed working hours, the employee has the right to request amendment of the flexible working time agreement and an increase of the agreed working hours. If the employer and the employee do not reach agreement on the new amount of agreed working hours, the employee’s agreed working time, as of the submission of the application to the employer, is the employee’s average number of working hours over a period of seven days during the last six months. 

Important rights and keeping account of working time:

• The employee always has the right to refuse additional hours; acceptance must be confirmed, for example, by e‑mail. 
• Overtime is counted when the employee works beyond the agreed hours and the additional hours. 
• The employer who is required to keep working time records (and to draw up work schedules in the case of summarized working time) must maintain records in a way that clearly distinguishes: 
• agreed working hours, 
• additional hours, 
• overtime. 

Support from Leinonen Tax & Legal Team 

The Leinonen Tax & Legal team is ready to assist employers in implementing this new regulation and to answer any related questions. 

The post A New Opportunity in Employment Relations – Flexible Working Time Agreement  appeared first on Leinonen Estonia.

Estonia has world-class human capital, and its skilled workforce will be a great asset for any entrepreneur establishing a business in Estonia. The Estonian workforce is highly qualified and multilingual. English is widely spoken in the country.

Establishing a business in Estonia has been made extremely easy. It has become the first country in the world to offer e-residency. This means that entrepreneurs around the world can set up a business in Estonia if they are e-residents. It also allows the entrepreneur to run the business remotely.

COMPANY ESTABLISHMENT

Before undertaking business activity in Estonia, it is necessary to choose which type of legal entity to form. The Commercial Code of Estonia governs business establishment in the country. According to the commercial code, there are five forms of legal entities. These are private limited company (OÜ), public limited company (AS), general partnership (TÜ), and limited partnership (UÜ). The most common forms of business are a private limited company and a public limited company.

For private limited companies (OÜ), the share capital must be at least 0,01 EUR if there is one founder of the company. Even though the share capital can be only 0,01 EUR, it is highly advisable to establish a company with at least 2,500 EUR share capital.

For public limited companies (AS), the share capital must be at least 25,000 EUR.

Please note that the share capital has to be fully paid in before the establishment of the company.

There are two ways to establish a new company in Estonia. The first is the electronic registration through the Company Registration Portal. This option is available only for a natural person who has an e-residency or Estonian ID-card. A natural person- founder has an opportunity to establish a company with no contribution. The second option is registration through a notary.

TAXATION

Due to its relatively low tax rates and the absence of corporate income tax on retained and reinvested profits, Estonia has one of the most competitive tax systems compared to other countries. To ease business operations, all tax declarations can be submitted online.

In Estonia, companies are not subject to traditional corporate income tax. Estonian resident companies and the permanent establishments of foreign entities (including branches) are subject to 22% corporate income tax, calculated as 22/78, only on all distributed profits (both actual and deemed). Retained and reinvested profits remain taxed at 0%. The tax period for companies is one month, and corporate income tax must be declared and paid by the 10th day of the following month.

The personal income tax rate in Estonia is 22%. The taxation period for personal income tax is one calendar year. Taxation of employees’ income is generally performed by withholding income tax at a rate of 22% from the employee’s gross salary. Employers withhold taxes each month, meaning there are no additional payments or filing obligations for employees. Estonian tax residents must declare their worldwide income in Estonia, regardless of the income’s origin. Non‑residents are taxed only on the income they earn within Estonia.

Starting from 2026, all employees are entitled to a uniform monthly basic exemption of 700 euros, regardless of their income level.

From 1 July 2025, the standard VAT rate in Estonia is 24%. The reduced VAT rate of 9% applies to books, medical products, and periodic publications. A reduced VAT rate of 13% applies to accommodation services. A 0% VAT rate applies to all goods and services related to international business.

For more information regarding taxation in Estonia, please visit the Estonian Tax and Customs Board’s website.

EMPLOYMENT

The core of Estonian labour relations is regulated by the Estonian Employment Contracts Act (ECA).

Expats are liable to pay resident taxes in Estonia only if they stay in Estonia for at least 183 days over a period of 12 consecutive calendar months. When a foreign employee fulfils the criteria for tax residency in Estonia, he/she must register the form for the determination of residence.

To employ people for business activities in Estonia, it is always necessary to register employees in the Employment Register, which is maintained by the Estonian Tax and Customs Board. If employees do not yet have an Estonian ID number, they must obtain one from the local government.

The employer cannot ordinarily terminate an employment contract. If the employer decides to extraordinarily terminate the employment contract for a good reason as prescribed by the ECA, the written notice period must be determined according to the employee’s length of service. The notice period ranges from 15 days for employees with less than one year of service to 90 days for employees who have worked for more than ten years at the company.

The employee may ordinarily cancel an employment contract entered into for an unspecified term at any time by notifying the employer at least 30 calendar days in advance in a form that can be reproduced in writing.

The employer is required to justify the termination of the employment contract. The employee does not need to justify ordinary termination.

BEING AN EXPAT

Estonia is a member of the European Union so moving and working inside the EU for the citizens of EU-countries is free. However, if a foreign national wants to stay and work in Estonia for more than 90 days, a residence permit has to be applied.

The expat community is the biggest and liveliest in the capital, Tallinn. However, Tartu also hosts a rather big group of foreign students and workers.

For more information regarding residency in Estonia, please visit the official website of the Estonian Police and Border Guard Board.

INTERESTING FACTS ABOUT ESTONIA

• Estonia was the first country in the world to introduce e‑elections.
• Over 50% of Estonia’s territory is covered by forests.
• More than 40% of people of working age in Estonia have higher education.
• Estonia has been ranked first in the OECD’s International Tax Competitiveness Index for eleven consecutive years.
• The University of Tartu is the only university in the Baltics to be among the top 1.2% of the world’s best universities.
• The Estonian Song Festival (in Estonian “Laulupidu”) was first held in 1869 and has been recognized by UNESCO as a masterpiece of the oral and spiritual heritage of humankind.
• Estonia has over 2,300 islands, with a combined permanent population of more than 40,000 residents.
• Over 134,500 people worldwide have joined Estonia’s e‑Residency programme, establishing more than 39,300 companies in Estonia.
• Estonia’s digital state model enables more than 99% of public services to be used fully online.

If you’re interested in starting a company in Estonia, contact our experts for a consultation.

The post BUSINESS IN ESTONIA appeared first on Leinonen Estonia.

What is Estonian e-Residency?

The Estonian e‑Residency is a state‑issued digital identity that enables its owner secure access to a large amount of digital services in Estonia. While it is indeed not mandatory for non-resident Estonian company management board members, it provides several important advantages for the management members of Estonian companies.

The Key Benefits & Advantages of the Estonian e‑Residency

Digital signing of documents

Estonian e‑Residency allows you to digitally sign documents using a qualified electronic (QES) signature that is legally equivalent to a handwritten signature throughout the EU. This enables the e-Resident to sign management board decisions, powers of attorney, employment‑related documents, and contracts remotely, without the need for physical presence, courier services, or notarisation abroad.

Access to Estonian e‑services

With e‑Residency, you can securely access the Estonian Business Register, Estonian e-Tax system and other state portals. This allows you to review and submit filings, monitor your company data, and interact with public authorities in a straightforward and efficient manner.

Efficient company management from abroad

Estonian e‑Residency significantly simplifies day‑to‑day corporate governance for non‑resident management board members by allowing all formal actions to be carried out digitally and without delay. This is particularly valuable where decisions must be taken quickly or where board members are located in different jurisdictions.

Reduced administrative burden and faster processes

Digital signing and direct access to Estonian electronical systems reduce administrative friction, lower transaction costs, and shorten timelines for corporate actions such as changes in the Business Register or execution of business agreements.

Business continuity and risk management

From a company perspective, having e‑Resident management board members ensures smoother operations and reduces dependency on physical meetings or local representatives for routine formalities.

What to Keep in Mind Regarding Estonian e-Residency

Please note that e‑Residency does not create tax residency, personal residence rights, or immigration status in Estonia. It is only a digital identification tool designed to enable secure and efficient participation in Estonia’s digital business environment. For these reasons, e‑Residency is often used by non‑resident management board members of Estonian companies and is considered a good practice in cross‑border corporate governance.

If you decide to proceed, the application can be submitted online (https://www.e-resident.gov.ee/become-an-e-resident/), and the process is straightforward. Please note that the management member must apply personally and submit replies to some personal questions (e.g. social media accounts).

Leinonen Estonia Tax & Legal Team would be happy to assist or answer any questions you may have in relation to this topic.

The post Why Estonian e‑Residency Is Essential for Efficient Cross‑Border Company Management appeared first on Leinonen Estonia.

What are Employees Legally Entitled to During Public Holidays in Estonia?

An employee’s entitlements on Estonian public holidays vary depending on the nature of their work and the position they hold. In roles that reasonably allow for time off during public holidays, employees are legally entitled to the days off work. In positions that require work to continue on public holidays, employees are entitled to additional compensation for the inconvenience.

This compensation can be in the form of:

1. Double wages. This is required by law and is the usual form of compensation for working on a public holiday.
2. Extra days off. An employee can be compensated with additional time off, but only if they agree to it. In this case, they would receive their usual wage for the hours worked on the public holiday, and their usual wage for the extra day off, too.

Are There any Scenarios in Which Employees do not Have These Entitlements?

Yes – some employees in Estonia are designated as having ‘independent decision-making capacity’. This gives them the freedom to organise their own working hours. Because these employees have complete autonomy over when they work, the standard procedures for compensating work on Estonian public holidays do not apply.

How Does Overtime Work on Public Holidays in Estonia?

If an employee works overtime on an Estonian public holiday, they must be paid overtime rate (1.5x their usual wage), plus double wages for working on the public holiday. This means they should be paid 2.5x their usual wage (not 3.5x, which would mean the basic wage is counted twice).

When are Estonia’s Public Holidays?

• 1^st January: New Year’s Day.
• 24^th February: Independence Day and anniversary of the Republic of Estonia.
• Two days before Easter Sunday (3rd April 2026): Good Friday.
• First full moon Sunday after vernal equinox (5th April 2026): Easter Sunday.
• 1^st May: May Day.
• Seventh Sunday after Easter Sunday (24th May 2026): Pentecost.
• 23^rd June: Victory Day.
• 24^th June: Midsummer Day.
• 20^th August: Day of Restoration of Independence.
• 24^th December: Christmas Eve.
• 25^th December: Christmas Day.
• 26^th December: Boxing Day.

Do any Specific Public Holidays Have Unique Regulations?

There are four public holidays in Estonia on which employers must shorten the immediately preceding working day by three hours. This rule is only applicable when the day before the holiday is a working day. For example, if a public holiday falls on a Sunday and the business does not operate on a Saturday, the employer is not obliged to shorten the Friday.

The four public holidays this rule applies to are:

• New Year’s Day.
• Independence Day and anniversary of the Republic of Estonia.
• Victory Day.
• Christmas Eve.

It is important to note that shortening the preceding working day by three hours is fixed, regardless of how many hours an employee usually works. This means that if an employee works part-time for three hours each day, they are not required to work at all the day before these public holidays.

If a business is unable to shorten the preceding working day, employees can be asked to work as usual. In this case, they should be paid an overtime rate of 1.5x their usual wage for any hours not shortened. If the employee refuses (and notifies their employer immediately), they are legally entitled to the time off. If no refusal is made, this can be interpreted as both parties agreeing not to shorten the working day.

How is Holiday pay Calculated in Estonia?

If the working time falls on a public holiday, the employer must pay 2 times the wages for the work. The calculation is as follows:

1. Determine the salary the employee receives for the specific month.
2. Divide this salary by the standard work hours for that month to find the hourly rate.
3. Multiply this hourly rate by two, which is the coefficient for working on a public holiday.
4. Multiply the result by the number of hours worked on the public holiday.

Leinonen’s accounting, payroll and tax experts specialise in cross-border commerce for foreign-owned companies doing business across northern and eastern Europe. With 34 years of operating in Estonia, you can rely on our local expertise already trusted by over 300 foreign-owned businesses in the country. Get in touch today to arrange a consultation.

The post Public Holidays and Holiday Pay in Estonia appeared first on Leinonen Estonia.

In this article, Leinonen experts will explain the complexities of Christmas bonuses that you need to know when operating a foreign-owned business in Estonia.

How are Cash Bonuses and Non-cash Gifts Classified Under Estonian Labour Law?

Cash bonuses and non-cash gifts are defined differently under local labour law in Estonia. Both must be declared on monthly TSD forms, with cash bonuses being declared as salary and non-cash gifts being declared as fringe benefits.

Taxation of Christmas Bonuses in Estonia

Taxation of Cash Bonuses

Cash bonuses are simply taxed as salary in Estonia.

This means they are subject to:

• 22% personal income tax (PIT)
• 2-4-6% pension funds
• 33% social tax
• Unemployment fees (1.6% employee contribution and 0.8% employer contribution)

Taxation of Non-Cash Gifts

Non-cash gifts are taxed as fringe benefits, meaning the employer must pay 33% social tax and 20/80 corporate income tax (CIT).

Can Non-cash Gifts be Exempt From tax in Estonia?

Yes. Promotional gifts up to the value of €21 excluding value added tax (VAT), and certain health gifts up to the value of €400 per year are not subject to tax in Estonia.

Are Christmas Expenses Deductible for Corporate Income tax Purposes?

Business-related expenses are deductible, while fringe benefits trigger taxation. Collaborating with a local expert on tax in Estonia will give you clarity on what classifies as a business-related expense, so you can stay compliant and avoid penalties.

Disbursing Christmas Bonuses in Estonia

Is There a Recommended Timeline for Calculating and Disbursing Christmas Bonuses?

Christmas bonuses in Estonia are usually paid in December. This will likely be appreciated by employees, who may wish to use their bonus for personal Christmas expenses.

Can Christmas Bonuses be Disbursed in January?

Yes, but this moves tax and reporting into the next year. This means that if taxation has changed in the new year, any new rules will apply to the Christmas bonuses (e.g., if income tax has been raised).

Can Bonuses be Processed With the Regular Payroll run?

Christmas bonuses in Estonia can be included in regular payroll or processed separately, depending on the company’s preference.

What Supporting Documentation is Required?

Primary or source documentation and payroll records are required for calculations.

What are the Consequences of Incorrect Classification or Late Reporting of Bonuses?

Businesses often face fines for misclassification or late reporting of cash bonuses and non-cash gifts. To avoid making these easy mistakes, consult with a local Estonian tax professional at Leinonen.

Cash Bonuses vs. Non-cash Gifts: Which is Best?

Cash bonuses and non-cash gifts each have unique benefits. While cash bonuses are greatly appreciated and simpler for reporting purposes, they are subject to heavy tax in Estonia. On the flipside, non-cash gifts are subject to reduced taxation (or tax exempt), and are great for employee engagement.

In practice, many companies choose to provide a combination of the two; offering modest cash bonuses alongside small tax free perks they know their employees will appreciate.

Handle Christmas Bonuses With Confidence With Leinonen Estonia

Over 330 businesses have entrusted Leinonen to streamline their accounting, payroll, and tax in Estonia. With more than 30 years in operation, our local experts specialise in supporting foreign-owned businesses in Estonia.

Contact Leinonen Estonia today to get true peace of mind with tailor made accounting, tax and payroll services.

The post Managing Christmas Bonuses in Estonia: The Basics for Foreign-owned Businesses appeared first on Leinonen Estonia.

Key Changes:

• The general tax-free income is fixed at €700 per month (up to €8,400 per year) for all residents, regardless of total annual income.
• The previous system, where the tax-free amount decreased as income increased, has been abolished.
• This uniform exemption applies to payments made on or after 1 January 2026, irrespective of when the income was earned. For example, salary earned in December but paid in January will be subject to the new rules.

Employer and Employee Responsibilities

1. Application Requirement
   • Tax-free income can only be applied by an employer upon receiving a written application from the employee.
   • If the employee has multiple employers, the application may be submitted to only one employer.
2. Employee’s Responsibility
   • The employee is solely responsible for monitoring their total annual income to ensure the €8,400 limit is not exceeded. Employers are not obliged to advise or verify this.
3. Choice of Amount
   • Employees may request the full €700 per month, a smaller amount, or opt out entirely.
   • If no application is submitted, income tax must be withheld from the first euro.
   • Employees who previously applied for a lower amount must submit a new application to increase it.
4. Timing of Application
   • The exemption applies based on the payment date, not the earning period.

Recommendations for Employers

To ensure a smooth transition to the new rules, employers should:

• Inform employees about the updated regulations and internal procedures for handling applications.
• Prepare a standardized application form to ensure compliance and accuracy.
• Set clear submission deadlines, ideally before the first payroll in January 2026.

Questions? We’re Here to Help

If you have any questions or need assistance with implementing these changes, please contact Leinonen Tax and Legal team. We are here to help you ensure compliance and make the transition as smooth as possible.

The post Tax-Free Income Changes In 2026 – What the Employer Has To Know? appeared first on Leinonen Estonia.

It is a known fact that there is a lot of competition for skilled labour in certain sectors, and many employers spend quite significant sums and also invest a lot of time to secure the best available employees. However, the recent labour market situation has led to new, somewhat unexpected concerns for employers. Namely, what to do in a situation where an employment contract has been concluded with an employee, but the time for starting work has not yet arrived and one of the parties wishes to cancel the employment contract? What are the rights and obligations of the parties then and what needs to be addressed?

Withdrawal is not an option

One thing is for sure, there is no such option to simply withdraw from an employment contract. In order to terminate a concluded employment contract, the conditions prescribed by law must be complied with. It is also important to remember that the ordinary cancellation of an employment contract by the employer is not possible. For cancellation of an employment contract, the employer must have good reasons prescribed by law that provide grounds for extraordinary cancellation.

Ordinary cancellation

However, the employee is entitled to ordinary cancellation. The employee does not have to justify the ordinary cancellation of the employment contract. In such a case, the grounds for cancellation are irrelevant and the only thing to follow is the statutory term for advance notice. However, this is one of the main conditions that many employees mistakenly fail to meet. Namely, employees think that if employment has not yet started, the contract may be terminated as if by a simplified procedure, informing the employer that the employee does not start employment. There have also been situations where the employment contract is terminated on the wrong grounds, for example, by using the terms and statutory provisions concerning the probationary period. In the present case, however, the probationary period has not begun, so such a basis is not appropriate.

Term of notice and compensation for damage

The term which the employee must comply with arises from subsection 98 (1) of the Employment Contracts Act (hereinafter TLS) and is at least 30 calendar days. If an employee does not comply with the term for advance notice and gives a shorter notice of cancellation, the employer has the right to receive compensation on the basis of subsection 100 (5) to the extent that the employer would have been entitled to upon observance of the term for advance notice. This right of the employer is something that many companies are not aware of and it is not very widely applied.

Employers have become more aware of subsection 74 (3) of TLS, according to which an employer has the right to demand compensation for damage if the employer cancels the employment contract with an employee on the grounds that the employee does not commence work without good reason or leaves employment without advance notice. However, this provision is applicable only if an employee who has entered into an employment contract does not commence employment on time and fails to give prior notice to the employer of this and of the wish to terminate the employment contract, i.e. if the employee does not comply with the term for advance notice at all. Such conduct provides a basis to the employer for extraordinary termination of the employment contract for a reason arising from the employee. When calculating the amount of damage caused to the employer by such conduct, it is presumed that the amount of damage corresponds to the average monthly salary of the employee. I would also like to point out that the employer has a rather limited time limit for claiming compensation for such damage.

However, it is not yet common practice here to claim compensation for damage from employees on this basis. It is more likely in these cases that our employers throw their hands up, take it as a lesson and try better next time. There have also been cases where employers want to apply a contractual penalty when making an employment offer to an employee in case the employee does not commence work on time for any reason, but this is not provided for in our employment law. Employers can only defend themselves on the grounds and with the means described above.

Termination by agreement

Of course, I cannot fail to mention the last, and probably the most used option, i.e. termination of employment contract by agreement of the parties. In such a case, legally, the most correct way would be to draw up an agreement in which the parties confirm their will and that they have no potential claims against each other in connection with the termination of the contract. Yet, the reality is that the employer takes notice of the employee’s cancellation, fails to use the remedies available to the employer, and as mentioned earlier, restarts the recruitment process.

It will certainly take time for new practices to become established, but it will probably not be very long before employers start using their rights more widely to cover some of the costs of recruiting in today’s competition. So, here’s a reminder for both sides of the employment relationship: it is wise to be aware of all the rights and obligations that one has. If you need further help or have a more specific legal question, the legal advisers of Leinonen are always ready to help.

The post What are the possibilities if you want to cancel an employment contract before employment starts? appeared first on Leinonen Estonia.

Therefore, when the employee wishes to come back after this long leave, the employer might need to make difficult decisions. For example, during the years of the employee’s absence, the employer has restructured the company structure, and the returning employee has basically no active position anymore. However, the employer needs to always consider the following:

1. The employment contract of the employee on this leave remains still in force. The employment contract does not automatically change or expire because of that. NB! It is also forbidden to lay off an employee who uses maternity/paternity leave, adoptive parent leave and parental leave (except in cases of company bankruptcy or liquidation).
2. The employee has the right to improved working conditions to which they would have been entitled during their absence. This means, for example, if the employer decided to raise the overall salary of every employee by 2%, the 2% raise applies to the absent employee as well.
3. In case the employee returns from their leave and their child is still under 3 years old, the employee shall also get the following protection:
   • In case of lay-off, they are the one entitled to stay compared to other employees working in the same position.
   • In case of business trip, the employee must agree to the business trip (it is not a unilateral decision of the employer).
   • In case of employment termination, the employer must prove and justify the legal grounds of termination (e.g. breach of employment contract), the law states that employment was terminated due to employee being pregnant or raising a child under 3 years of age (this is illegal).

Thus, we advise the employers to always consider the employment contracts of the absent employees when making organisational decisions and to consult with lawyers to avoid possible legal disputes. As pregnant employees and parents of children under 3 years of age are more protected by the law, it is way more likely that the labour dispute body shall rule against the employer.

Based on our practice, we also recommend employers to be more cautious when considering granting bonuses to employees on parental leave. Employees receive state-provided income during their leave, and there is a maximum monthly income threshold they must not exceed not affect their state-provided income. In 2025, the monthly limit is 2 632.55 EUR (gross). 

As employers do not have access to the info whether the employee has any additional income during their leave, it is recommended for employers that they consult with their employees regarding the planned bonus payment beforehand. In case the employer pays the bonus, and because of the bonus payments the monthly limit is exceeded, the state shall start claiming payments back from the employee. To prevent misunderstandings and claims from the state, it is best to discuss potential bonus payments with the absent employee beforehand.

For more information or advice please contact us at tax-legal@leinonen.ee

The post EMPLOYEE ON A PARENTAL LEAVE – WHAT DOES THE EMPLOYER NEED TO KNOW? appeared first on Leinonen Estonia.

Salary and Payment Terms

The Employment Contracts Act lets employers and employees decide together how wages are structured. Wages can be based on the number of hours worked (like hourly or monthly salary) or on the tasks completed (known as piece work). It is important that the employment contract clearly states the amount of wage to make everything clear for employees.

Here’s what should be considered when setting wages:

• The amount of work and time it takes.
• The complexity of the job.
• The working conditions.
• Any special situations, like working night shifts. Wages must be fair and should not discriminate based on gender.

 For full-time workers, the wage must be at least the minimum wage set by the government. Wages should be paid in money, and this can include cash if both sides agree. Payments should be made at least once a month on a set payday mentioned in the employment contract. Employers can choose to pay wages more often, like every week, but not less than once a month. The payday should be on a specific date, such as the 5th of each month, or a specific day, like the first business day of each month. It should not be within a range of dates (for example, not between the 1st and 10th). If the payday is on a public holiday or a day off, the wages should be paid on the last working day before that. For instance, if payday is on a Sunday, the wages should be paid on the preceding Friday.

Salary Taxes and Contributions

Employers are required to pay and withhold certain taxes and contributions on the employee’s earnings.

** To be eligible for health insurance in 2025, the total social tax from one or more authorization agreements and/or service contracts must be at least EUR 270.60, which is the amount based on a gross monthly wage of EUR 820.

Minimum Wage in 2025

Employees have a right to earn at least the minimum wage. In 2025, this is EUR 5.31 per hour (gross) or EUR 886 per month (gross) for full-time employees. For those working part-time, the minimum wage is adjusted based on the number of hours worked.

Key Tax Changes in 2025

Salary calculations, EUR

• Starting January 1, 2025, the income tax rate is 22%.
• The basic tax exemption varies by income, up to 654 euros monthly or 7,848 euros annually.
• The funded pension contribution rate is set at 2%, 4%, or 6%, based on the individual’s choice registered. If no choice is made, it defaults to 2%.
• From January 2024, individuals can opt to increase their second pension pillar contribution rate from 2% to 4% or 6%. Changes must be requested by November 30 each year, and the new rate applies from January 1 the following year.

Overtime, night work, work on public holidays regulation

In Estonia, overtime is defined as work performed beyond the agreed-upon working hours and requires a mutual agreement between the employer and the employee. Employers can compensate for overtime by giving either equivalent time off or monetary compensation, based on what has been agreed. When overtime is paid in money, the rate is 1.5 times the regular hourly wage.

For work carried out between 10 PM and 6 AM, employers must pay 1.25 times the regular wage unless the salary already includes compensation for night work. Work on public holidays is compensated at twice the regular wage, recognizing the special circumstances of these days.

Navigating Estonian Payroll Regulations

Understanding payroll regulations in Estonia is essential for both employers and employees. Following these guidelines ensures that employees are fairly compensated and that businesses comply with tax laws, contributing to a balanced work-life environment. By becoming well-versed in these regulations, businesses can handle payroll duties in Estonia with confidence and integrity.

If you have any questions about managing payroll in Estonia, please reach out to us using the contact information provided below.

The post Payroll in Estonia: Key Changes from January 2025 appeared first on Leinonen Estonia.

As of writing this article, the following changes are also fully adopted:

1. New value added tax rate. Starting from 01.07.2025, the new VAT rate is 24% (previously 22%)
2. Tax-free limits changes. The maximum tax-free amounts of business trip daily allowance and personal car compensation are changed starting from 01.01.2025 the following:
   • The personal car compensation maximum tax-free amount shall be 550 EUR (previously 335 EUR) per month and 0,5 EUR (previously 0,3 EUR) per km.
   • The foreign business trip daily allowance maximum tax-free amount shall be 75 EUR (previously 50 EUR) per day for the first 15 days (maximum 15 days in a month) and afterwards 40 EUR (previously 32 EUR) per day.
3. Fringe benefit regulation limits change.
   Starting from 01.01.2025, the employer’s business-related expenses for the accommodation of an employee working on the basis of an employment contract are not deemed to be a fringe benefit if both of the following conditions are met:
   • the expenses per accommodated employee are up to 500 EUR (previously 200 EUR) a calendar month in the event of accommodation in Tallinn or Tartu and up to 250 EUR (previously 100 EUR) in other events.
4. Income tax on gifts, donations and costs of entertaining guests.
   Starting from 01.01.2025, income tax is not charged on goods delivered or a service provided for the purposes of advertising, the value of which without value added tax is up to 21 EUR (previously 10 EUR).
5. Security tax. Starting 01.01.2026, the 2% security tax shall be paid the following:
   The security tax applies to:
   • a resident natural person;
   • a non-resident who receives taxable income in Estonia in accordance with this Act;
   • a resident company;
   • a non-resident company that has a permanent establishment in Estonia.

Amendment of the funded pension contribution rate as of 01.01.2025

From 01.01.2024, natural persons who have joined the second pillar pension fund, are able to increase their 2% funded pension contribution rate to 4% or 6% if they wish (the chosen new rates in 2024 came into force in 01.01.2025). The application can be submitted by 30.11. every year at the latest and the contribution rate can be changed once a year. The new contribution rate will apply from 01.01. each year based on the application done the previous year.

For more information or advice please contact us at tax-legal@leinonen.ee.

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