Managing Cross-Border Payroll and tax in Estonia

If you are planning to establish an Estonian base for your foreign company, cross-border employment may become commonplace. Having a combination of local and foreign staff members on your payroll has an array of benefits for businesses and employees alike. It opens doors to a wider and more diverse talent pool, ultimately having the potential to boost your company’s profits and reach.

What is the Difference Between Cross-Border and Local Payroll and Taxes?

The biggest difference is that when a foreigner is employed in Estonia, they must conform to both their home country’s and Estonian tax rules. And while only Estonian income is taxed in Estonia, foreign income must still be declared. This is because these figures affect the calculation of tax-free income in Estonia.

How to Employ Someone who Crosses the Border to Work in Estonia

The individual’s employment should be registered using their Estonian personal identification code. If this is not available prior to the start of employment, you can register their employment for up to five days using their date of birth. Once they are assigned a personal identification code, this can simply be extended by changing the date of birth entry to the code (no need to make a new entry).

If a person only works in Estonia for up to five days, they do not need to get a personal identification code. However, the employer must apply for a non-resident code to declare payments. This is done by submitting an application to register a non-resident payment recipient to the Tax and Customs Board.

Where can an employee apply for an Estonian personal identification code?

At their local government of the county centre in Estonia.
At an Estonian foreign mission located abroad.
Some individuals who take up permanent residence in Estonia can also apply by submitting a notice of residence to their local rural municipality or city government. Citizens of a member state of the European Union, the European Economic Area or the Swiss Confederation have this option.

Tax and Payroll Responsibilities for Companies

While any software used for Estonian payroll can also be used for cross-border payroll and taxes, there are some additional essential responsibilities for companies with cross-border employees.

If you’re paying wages to a non-resident employed in the territory of Estonia, you must:

Pay social tax (33%).
Pay employer’s unemployment insurance contribution (0.8%).
Withhold employee’s unemployment insurance contribution (1.6%) on their wages. Correctly withheld income tax is considered the final tax; there is no need for a non-resident to declare the income, unless the employer has not withheld the income tax correctly.

There are some exceptions to these general rules that can be found in EU Regulation No 883/2004. This regulation ensures employees that hold an A1 form proving they are subject to the social security legislation of another EU member state are not disadvantaged. Additionally, a non-resident employee can make deductions from their taxable income on the same grounds as Estonian residents if they reside in a contracting state of the European Economic Area.

You must notify the Police and Border Guard:

If you employ a foreigner.
If you do not enter a contract forming the basis of an employment relationship with a foreigner who has registered for short-term employment.
If the conditions of the employment specified in a temporary residence permit issued for employment are amended.
If premature or actual termination of a foreigner’s employment or contract occurs.

Where to Find More Information on Cross-Border Employment

When searching for information on cross-border employment, it is important to consult reputable sources and government websites. Here are some great resources you can refer to for more details:

Managing Cross-Border Payroll and tax With Leinonen

While cross-border employment can introduce a wealth of valuable knowledge and unique expertise to your business, having foreign employees on your payroll comes with several important responsibilities. Having operated in Estonia for almost 30 years, Leinonen’s competent, multilingual accountants are highly educated and experienced in dealing with Estonian payroll and tax regulations.

If you’re a foreign business looking to make a base in Estonia, rely on us to help you organise payroll and taxes, setting you and your foreign employees up for a successful and prosperous move to the Estonian market. To find out how we can help your business, get in touch today.