Amendments to the Estonian Income Tax Law
Amendments to the Estonian Income Tax Law were adopted by the Estonian Parliament on 19 June 2017 and Estonian President has announced the Law on 29 June 2017.
There are many different changes in the above mentioned law that make the employers’ life easier when providing bonuses to the employees, on the other hand there are new income tax rates, as well as the imposed advance corporate income tax to credit institutions, not to mention additional anti-avoidance provisions related to loans issued to other group entities.
Amendments, that will come into force on 1 August 2017
Amendments to fringe benefit taxation
- In case, where a personal car is being used for business purposes, the parking payments made during the course of performance of the professional duties can be reimbursed by the employer without any tax liability.
- The reimbursement of the accommodation expenses of the employee are exempt from fringe benefit taxes for the employer, in case, where the need for accommodation is related to the business of the employer itself, the expenses are within the marginal rate established by law, the employee’s home is at least 50 kilometers far from his place of work and the employee does not own any residential real estate, which would be located closer by. In Tallinn or Tartu the maximum expense per employer in one month shall not exceed EUR 200 and in other parts of Estonia EUR 100.
- The employer’s expenses related to the employees’ transportation will not be taxable as fringe benefits, in case the transportation by bus, in accordance with the Traffic Act is organized or if the employee lives at least 50 kilometers from the workplace.
- With regard to a person, who has been identified as having full or partial incapacity for work or who has a degree of disability, the expenses for the provision of aids to 50% of the amount of social tax paid during that year shall not be considered as fringe benefit.
Basic exemption deduction
- A resident natural person has the right to deduct an additional basic exemption from the income tax period for a resident spouse of up to EUR 2160, if the taxable income of a resident natural person and his spouse does not exceed a total tax liability of EUR 50,400. The provision will be implemented retroactively as of 1 January 2017.
Changes in the taxation of the employees’ share options.
- The aim is to establish that the period between the issuance of the share option and its realization, in order to receive a fringe benefit, does not have to be 3 years, in case of the transfer of shares of the company or the death of the employee. This way the amount taxable as a fringe benefit would only be the part left from those three year. In case the option agreement is not digitally signed or notarized, the employer has to send the agreement to Estonian Tax and Customs Board within 5 working days.
Amendments that will come into force on 1 January 2018
New CIT rates on regular profit distributions
Under the Income Tax Act, the CIT rate on regular profit distributions has been reduced from 20% to 14%. Dividends paid to natural persons will be subject to an additional 7% income tax withholding, if such dividends have been received from an Estonian company and are subject to a 14% CIT rate. The income tax rate for all amounts exceeding the last three years’ average profit distributions will remain taxable at the regular 20% rate (technically, 20/80 on the top of net distributed dividend).
The first year, when the 14% rate will apply is going to be 2018 and the 14% will be applied as follows:
1) In 2019 to one third of 2018 taxable distributed profit
2) In 2020 to one third of the 2018 and 2019 taxable distributed profit combined.
Tax-exempt dividends received from subsidiaries will not be included in lower tax rate profit distribution calculations, as well as tax on hidden profit.
New Tax regime for credit institutions
- The resident credit institutions and the Estonian branches of the non-resident credit institutions shall have an obligation to pay the advance payments of income tax at the rate of 14% from the profits earned in the previous quarter. The advanced payments will have to be made by the 10th calendar day of the 3rd month of the ongoing quarter.
Increased burden for given loans within group entities.
- Instead of deposit income tax, the Parliament has adopted the additional reporting requirements, as well as the new requirements for taxpayers to prove that intra-group loans are not a hidden profit distribution. Loan agreements between related parties that involve transactions, where the main purpose is not to do business, but to avoid CIT (hidden profit shifting) are taxable. Loans with terms (or extensions) longer than 48 months raise an obligation for the taxpayer to prove (if the tax authority so insists) the payee’s ability to pay such loan back and the intention to do so. The tax authority has to give 30 days to respond to such request. The obligation to (quarterly) declare given loans will affect the loans that have been issued or significantly changed after July 1, 2017.
New rules to calculate fringe benefit on company’s car
- In case, where an employer is enabling an employee to use the company’s car for personal purposes, it will now be possible to calculate the fringe benefit only on the kilowatt basis, regardless of the distance travelled. Also, an obligation to inform the Estonian Road Administration about using a certain car only for business purposes has been added.
Increased basic exemption
- Two formulas for the calculation of basic exemption deductible from a resident natural person’s income have been introduced into the law:
1) If the income exceeds EUR 14 400, the amount of basic exemption is calculated according to the following formula: 6000 - 6000/10 800 × (amount of income - 14 400). However, the tax-free income may not be less than zero.
2) The amount calculated, according to the following formula is calculated on the basis of the taxpayer's written application in the calendar month before deducting income tax from the resident natural person, which is calculated according to the following formula: 500 - 500/900 × (payment - 1200). This amount cannot be less than zero. In his application the taxpayer may ask for a deduction of a smaller amount.