The issue of taxing the salaries of non-residents in Estonia is crucial in financial planning for both employers and employees alike. Understanding the conditions under which a non-resident's salary is subjected to taxation in Estonia helps in avoiding mistakes and financial losses. Estonian tax legislation sets clear criteria for the taxation of foreign workers' incomes, which depend on their place of work and the employer's location.
When is a non-resident's salary taxed in Estonia?
When considering this issue, it is important to pay attention to 4 conditions.
- Work is carried out in Estonia. If a non-resident works in Estonia under an employment, civil law contract, or as a public servant, and their employer is located in Estonia, the income of such a non-resident is taxed in Estonia.
- Duties are performed for an Estonian employer. An important condition is that the work must be carried out directly for an employer registered in Estonia.
- Taxation of provided benefits and bonuses. If a non-resident employee receives various benefits and bonuses from the employer for work performed in Estonia, such payments are also taxed.
- The worker has the right to work in Estonia. In Estonia, not just anyone can be employed. They must have the right to work in Estonia.
When is a non-resident's salary not taxed in Estonia?
However, there are exceptions to these general rules. If a non-resident performs their work duties outside the territory of Estonia, then their salary and any benefits and bonuses provided to them are not taxed in Estonia. In such a case, information about payments to the non-resident is not subject to declaration in Estonia. This means that if a worker, who is a non-resident, works outside of Estonia for an Estonian company, the income from such work is not subject to taxation in Estonia.
An example could be a situation where an employee of a company registered in Estonia, but who is a resident of another country, for example, Lithuania, performs all their duties exclusively in Lithuania. In such a case, the Estonian company is not obligated to declare and tax the payments made to such an employee in Estonia.
As a result, the tax obligations of the employee and employer are determined according to the legislation of the country where the work is actually performed.
NB! For advice on tax issues in the country of the employee's tax residency, we recommend consulting a tax advisor from that country.
What does this mean for employers and non-residents?
Employers need to accurately determine the place of work of their non-resident employees for the correct calculation of taxes. And for non-residents, it is important to know the conditions under which their income in Estonia will be taxed, and when such taxation does not occur.
Example
If you, as the owner of an Estonian company and a non-resident of Estonia, want to employ yourself as a worker of your company, then when performing work outside of Estonia, you will not have the obligation to register in the Estonian Employment Register, nor the duty to pay taxes on such salary in Estonia. Taxes will arise in your country of residency.
Exception
If you wish to work under a board member's contract, then in Estonia, you will have the obligation to register in the employment register and pay taxes in Estonia.
Conclusion
Understanding the nuances of taxing non-residents' incomes in Estonia will help both employers and employees themselves to avoid unforeseen tax consequences and penalties, so we highly recommend familiarizing yourself with all the materials on the topic of salaries in our knowledge base.