The changes to the Income Tax Act came to force on 1st January
Several changes of the Income Tax Act (abbreviated ITA) came to force from January 2015.
1Office brings out the most important changes of the Income Tax Act for entrepreneurs operating in Estonia.
The basic exemption of a natural person increased by 120 euros
From 01.01.2015 a resident natural person’s tax-free income for the taxation period is 1848 euros or 154 euros per month (ITA § 23). This has to be taken into account on paying salaries when calculating the tax-free profit of the contractor.
The income tax rate decreased by 1%
From 01.01.2015 the income tax rate is 20% (TMS § 4). Companies must withhold 20% income tax instead of the previous 21% for December earnings paid in January.
Taxation of the non-resident board member’s earnings
Income, which a non-resident received for exercising the functions of a board member of an Estonian company or the manager of a non-resident company’s permanent establishment in Estonia, is taxed with Income Tax. For the purposes of taxation it is no longer important whether the remuneration to the non-resident is paid by an Estonian company or a non-resident person, but the circumstance that the payment is received for the exercising of the functions of the member of a management or control body an Estonian company or permanent establishment.
The fee for the member of a management or control body is essentially a type of employment income, which is taxed similarly to other types of work income and in case of failing to withhold income tax, the taxpayer himself is liable for the performance of the tax obligation. In case Estonian income tax has not been withheld from the fee, then it is the obligation of the non-resident who received the income to submit an income tax return by 31st March.
The minimum rate of the interest, which is the basis of fringe benefit, will decrease
The giving of a loan corresponding to market conditions will not be considered a fringe benefit from January 2015. The amendment of the Income Tax Act § 48 section 4 clause 6 will dispose of the minister of finance’s obligation to establish the minimum rate of the interest, which is the basis of fringe benefit, with a regulation. A loan compliant with market conditions is considered as the giving of a loan, the interest of which at the time of payment is higher than the European Central Bank’s double interest rate applicable to main refinancing operations published by the Bank of Estonia according to the Law of Obligations Act § 94 section 2. The last interest rate published by the Bank of Estonia before 1 January 2015 was 0,05%.
Declaring the circumstances affecting income tax liability
On the basis of a taxation period, a taxpayer incurs an obligation to declare not only the expenses and payments specified in § 49-53 of the ITA but also the circumstances affecting tax liability specified in § 50 and 53 ITA. The circumstances affecting the incurring of tax liability and its size are payments made into the equity of the company, income tax withheld and paid in a foreign state, income received, on account of which dividends can be paid free from income tax and payments made from equity. Also the same rights belonging to another company, which are received in the course of the merging, division or restructuring of companies. For example an obligation to declare will arise if a taxpayer received a dividend or other payment from a company in the course of the taxation period, which will allow the taxpayer to pay dividends or make other payments from equity without incurring tax liability. Undeclared rights cannot be used for tax exemption and reduction as a result of the amendment.
A resident legal person and a non-resident legal person holding permanent establishment in Estonia is obligated to submit a tax declaration by 10 February 2015 for the costs and payments specified in § 49-53 and the circumstances affecting tax liability provided in § 50 and 53 as at 31 December.
To receive additional information contact the accountants of 1Office Estonia on the telephone number +372 631 1118 or contact@1office.ee.
