Cash bonuses and non-cash gifts are great ways to elevate employee morale and engagement. Christmas bonuses are not mandatory in Estonia, but they are common. Providing something for your employees during the festive season will help you solidify your reputation as an excellent employer.
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.
