How to Motivate Your Contractors and Reduce Tax Payments: Fringe Benefits in Estonia

Apr 5, 2022 · 4 min read

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Whereas revenue goals are core targets for a business, entrepreneurs have a series of complementary objectives such as supporting their work teams and optimizing a tax load. It often lacks attention especially when you’re a startup or a new company. Legal requirements that vary from country to country also complicate the closing of these objectives.

Today we will review one of the ways to motivate your employees economically – fringe benefits, — and tax incentives which you can get by realizing it in Estonia. Let’s dive in!

What Are Fringe Benefits

Fringe benefit is a nonwage payment offered to an employee by an employer. These benefits may be required by national legislation or granted unilaterally by employers. In competitive markets, employers use fringe benefits along with a salary to attract high-value employees, therefore it’s usually given during recruitment.
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Fringe benefits required by law typically comprise health insurance and social security. A list of optional fringe benefits may include:

  • meal plans,
  • gym membership,
  • education financial assistance,
  • company car,
  • employee stock options,
  • retirement planning services,
  • paid time off,
  • and others.

Payments for fringe benefits are not usually liable to corporate income tax. However, an employer may be obligated to pay an employee a personal income tax on fringe benefits to a certain extent.

In Estonia a calculation is as following:
tax on fringe benefits = income tax (rate of 20/80) + social tax (rate of 33%)
For example, a company pays an employee a fringe benefit of €1000:

Income tax €250 = 1000 x 20/80
Social tax €412,50 = (1000 + 250) x 33%
Tax on fringe benefits €662,50 = 250 + 412,50

Total cost for an employer is €1662,50 = 1000 to an employee + 662,50 tax
And then the employer should submit a tax return form to the Estonian Tax and Customs Board by the date.

But! Some fringe benefits are not taxed. Is that even legal? — Yes, it is. Why does a government sometimes let entrepreneurs not pay taxes? — To incentivize a particular economic activity of employers.

When businessmen get tax payments reduced, they’re encouraged to reiterate the action that came to the reduction. In legal language, it’s called a tax incentive. Thus, we have tax incentives for fringe benefits in Estonia.

Who Can Get Tax Incentives

Estonian government encourages employers to invest in the health and sports activities of their employees. This applies to almost all types of recruitment. Moreover, it’s a condition that an employer has made this fringe benefit available to all employees:

  • full-/ part-time workers under an employment contract;
  • recurrent independent contractors (e.g. service contract);
  • members of a management body;
  • sole proprietors who sell goods to an employer for longer than 6 months.
How to hire an employee in an Estonian company
In fact, you integrate into the fringe benefits program every person who regularly contributes to your company. Τhe spouses, partners, or relatives of the employees remain outside of the program. The employees of another company if you have one or even a group of companies are not included too.

What Fringe Benefits Are Tax-Free

There are two major categories of fringe benefits that you can get tax incentives in Estonia for - health and sports expenses and car compensation.
Tax incentive for health and sports expenses:

Employee motivation: public sports event, gym membership, sickness insurance contract
Cost savings: up to €100 per employee per quarter including VAT
Tax-free expenses for heath promotion cover range of situations as follows:

  1. participation fee in public sports events - worldwide
  2. costs of regular use of sporting and fitness facilities
  3. costs of maintenance of the in-house sports facilities
  4. price of the services of certificated therapists
  5. health insurance premiums of a sickness insurance contract
Compensation for the use of a personal car:

Employee motivation: paid business trip to an official or a management board member, rides between home and workplace in some cases
Cost savings: up to € 0.30 per km, max € 335 in one calendar month
A personal car is not one that is owned or possessed by the employer. It’s not necessarily the one that is owned or possessed by the employee as well, but s/he should have a proven right to use this vehicle.

Expenses for the use of a personal car could be tax-exempt in the following cases:

  1. business trips to an official
  2. business trips to an employee who is an Estonian taxpayer
  3. a member of the management or control body of a company
  4. rides between the place of work and the residence if it’s not possible to do it by public transport with reasonable time and money costs
  5. rides between the place of work and the residence if your employee in Estonia lives 50+ km from the place of work

In summary, using these fringe benefits an entrepreneur will be able to provide additional motivation to their employees notably independent contractors as long as they can participate in the sports events in their cities, and counties, or, for instance, have a mobile app for fitness.

Motivation is a driver for business growth, and besides, an entrepreneur will get tax incentives under the conditions described in Estonian law. While legislation may seem a bit complicated, Enty gives businessmen solutions to automatize basic accounting and get professional advice on Estonian taxation.
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