Recruitment for Estonian company: how to hire globally
Human resources are the most fundamental and central competitive resource of a company, thus you have to take responsibility for the type of hiring. Choosing a proper framework of relations with an employee will help you to build an effective workforce that moves forward your business.
Once you have a company in Estonia there are several conditions to be considered in the recruitment as whether a candidate is an Estonian tax resident or not, whether s/he comes from EEA or a third country, etc. Let’s go over the types of employment, their pitfalls, and their benefits.
Hiring Employees From Estonia
Estonian Tax Resident
employment: full-time
pros: no permits, contribution to social security, physical presence in Estonia
cons: tax liabilities in Estonia, absolute regularization
The simplest situation: An Estonian company hires a resident of Estonia who naturally has the right to live and to work there. The employment terms are mediated by Labour Relations in Estonia. After the terms agreed your company has to register the employee in the Employment register. Τhen you incur liability for payroll taxes.
Both an employer and an employee are taxed, but in fact, an employer pays all the taxes. For example, from the EUR 1,000 salary, you expel EUR 128.8 as employee contributions and pay an extra EUR 338 as employer contributions. Thereby, the total cost of the employee is EUR 1.338 per month.
Employer Contributions:
Social Tax: 33%
Unemployment insurance (employer’s part): 0.8%
Employee Contributions:
Funded pension: 2%
Unemployment insurance (employee’s part): 1.6%
Income Tax: 19.28%
Through payment of taxes, you contribute to the social security and pension system of Estonia. It’s definitely a benefit for your business reputation. In this way, you’ve also got a physical presence in Estonia for some accounting, banking, etc. reasons in case you do business online from another country.
Among the shortcomings of this employment type is a requirement to meet several regulations for a full-time employee. The minimum wage rate, working hours, public holidays in Estonia, leaves, and termination periods seem quite liberal and help to keep your employee reasonably happy. However, some startups or online businesses may need more flexible frameworks.
Hiring Employees From Outside Estonia
EEA or Swiss Tax Resident
employment: full-time
pros: no permits, no tax liabilities in Estonia
cons: potential tax liabilities in a county of residence, regularization in that country
Candidates who hold the nationality of any European Economic Area (EEA that includes EU, Iceland, Norway, and Liechtenstein) member state or Switzerland can easily be employed by an Estonian company. No residence permit or work permit is required. A thing you have to do before the employment contract enters into force is to register him/her in the Employment register.
This employee working remotely does not become an Estonian tax resident, therefore your company is free from tax reporting and payments in Estonia. However, your company may be obliged to declare taxes in the country of residence of the employee and be registered as a social taxpayer. That’s how it works in France, Italy, Spain, Germany, for instance. In several countries, you may need to open a local branch of your company. Anyway, you will pay payroll taxes in accordance with local tax rates.
EEA and Swiss tax residents also have a possibility to come to Estonia and start working physically there. For periods up to 3 months, no new responsibilities arise for the company. For a longer stay, the employee must register his/her place of residence in the population register of Estonia. Then he/ she becomes an Estonian tax resident and is approached as mentioned above.
Recurrent independent Contractor
Any country Tax Resident
employment: recurrent contactor
pros: no permits, reduces overhead, legal flexibility
cons: risk of misclassification, increased scrutiny
Employees coming outside the aforementioned jurisdictions should apply for a temporary residence permit to work on the territory of Estonia. There is a list of rationales for employment for a foreign employee, e.g. recruiting a top specialist or working at a start-up. But the entire employment process, in this case, implies a lot of paperwork and pains like proof of foreign talent’s qualifications.
Besides, there are conditions out of your area of responsibility such as an annual immigration quota for candidates from third countries who will get a residency permit in Estonia. Once the quota is filled, you cannot apply till the next year. For 2022, the quota has been set as 1,311.
Therefore, a better employment solution for all non-Estonian residents including EEA and Swiss residents might be a recurrent service contract. The contract gives greater flexibility concerning the wage, working time, termination. If an employee doesn’t fit your company, you don’t move forward with the contract. If a company needs to cut costs promptly, you should not struggle to save a workplace.
Last, but not least — a company pays 0% taxes for an independent contractor. You declare recurrent invoices from a contractor as expenses, which means that money is reinvested in the company. It is basically tax-free.
In the meantime, recurrent contractors attract increased scrutiny of tax and audit services. A risk of misclassification might result in steep penalties and damage to your company. You have to be careful building the contracts, invoices, and other covering documents to avoid penalty fines and unpaid taxes.
On Enty we’ve created templates for contractor agreements jointly with professional lawyers. You can conclude agreements just now in Enty HR. Fill in your Contractor’s info and general terms, get the Service agreement, sign it and upload it back. You can also hire employees, manage wage funds, synchronize data with accounting reports, and all the basic HR in a matter of minutes!
