Following this year’s coronaspring, teleworking (incl. use of home office) has become the new normal for a number of employees. The first wave of the corona outbreak in Estonia in the spring showed that in many sectors it is perfectly possible to organise work and perform work duties from a distance. Colleague Helen Kaur has written on the legal aspects of executing teleworking (article available: Working from home and agreement on place of performance of work), but let us not forget about taxation issues.
Enabling teleworking reduces the overhead office costs incurred by the employer, but we cannot really talk about any savings for the employer. If teleworking is agreed on with an employee, the employer is still responsible for setting up a workplace, regardless of whether the teleworking place is the employee’s home or another place where the person is working remotely (either temporarily or permanently). The taxation laws in force today do not regulate the taxation of costs incurred due to teleworking. Taxation should focus on the general provisions of the Income Tax Act and the Value-Added Tax Act and rely on existing court practice. The instructions of the tax authority on the taxation of home office expenses are also of help.
In beforementioned instructions, the tax authority describes that if the employer grants to an employee who has been sent to work from home, the necessary work equipment (e.g. a desk, chair, monitor), or buys such equipment for the employee, no taxes are charged on the transfer of assets provided that the assets to be transferred are on the employer’s account as movable property. If the assets granted by the employer remain with an employee, the market price of the assets must be found and taxed as fringe benefit. If employees reimburse the employer for the cost of such assets, there will be no tax liability. If an employee, upon reaching an agreement with the employer, purchases the necessary work equipment themselves, then the employer can reimburse them for such costs (based on an expense receipt) under a tax exemption only if the equipment is used for the purpose of performing work duties. Note! It should be taken into account that if the expense receipts submitted by employees are missing the name of the employer’s company, then companies which are VAT liable persons cannot deduct the value added tax indicated on the expense receipts because the invoice must include the name of the taxable person as the recipient of goods or services for it to be possible to deduct the input value added tax.
We advise employers to agree with employees in writing on the reimbursement principles of teleworking to prevent either party from abusing their rights. From the viewpoint of the employer, such an agreement would help avoid potential tax liabilities. Upon reimbursement of costs relating to working from home, the employer must take into account that it is not possible to reimburse all costs in full under tax exemption. For example, water, power and communication services constitute such cost categories which employees use both during and outside working hours for personal use. It is therefore important to settle on a reasonable proportion when it comes to mixed costs, i.e. determine in what part such costs relate to the employer’s business. Leinonen’s advisory team can help you execute teleworking agreements as well as reach an agreement on and execute (i.e. find a suitable proportion) potential costs to be reimbursed.
Clients often ask us if they can pay teleworking employees a fixed amount every month to cover teleworking costs (internet, utility costs, use of personal home for business purposes). The answer is yes, but not exempt from tax. However, an employee can, for example, rent to their employer a room/corner of their house that they use as an office. No fringe benefit will apply only if the rental price corresponds to the market price. Remember that rent is taxable income for employees and the employer must withhold income tax (20%) and declare it on the TSD (declaration of income and social tax, unemployment insurance premiums and contributions to mandatory funded pension) form. Note! Paying employees rent for using their home office is simply one possible solution and not in any way mandatory.
When employees work remotely, the employer may well incur less overhead costs related to the office they own/rent or they might even lose the need to own/rent an office, but at the same time, employers should take into consideration the costs of setting up teleworking as well as current costs. There are presently no tax incentives in Estonia that apply to setting up or performing teleworking. When it comes to taxation and setting up teleworking, it is important to keep track of whether the assets provided by the employer stay in the possession of the employer of are given to employees. Upon reimbursing employees for costs related to the use of home office, be sure to analyse the link between the costs and business – the employer must justify the proportion of the costs to be reimbursed and there must be documentary evidence of the costs incurred to prevent the employer from having to pay income and social tax on reimbursed costs (fringe benefit).
Feel free to contact our tax and legal advisors with any questions you might have.