In today's crisis-ridden Estonian economic environment, entrepreneurs face many challenges, one of which is the efficient management of tax liabilities. One important aspect that deserves close attention is the concept of special benefits (Erisoodustus). In this article, we will take a closer look at what special privileges are, how they are regulated by Estonian law, and what consequences they may have for your business.
What is a special benefit?
Special benefits are certain benefits or services that employers provide to their employees over and above their normal wages. This can be anything from the use of a company car for personal use to the payment for training courses that are not work-related. It is important to realize that such benefits are considered income to the employee and are subject to tax liability.
Taxation of special benefits
Under the Income Tax Act (TuMS), special benefits may be subject to personal income tax at a rate of 20/80 and social tax at 33%. This means that the total cost of such benefits to the company may be twice as high as the standard costs, given the impossibility of refunding Value Added Tax (VAT) for such transactions.
From a tax perspective, special benefits are calculated "in reverse order" as if the employee received the equivalent of the benefit in cash. This means that personal income tax and social tax are calculated based on the estimated "gross" value of the benefit increased by the corresponding tax burden.
It is important to note that not all employer-provided benefits are special benefits. For example, items necessary for work, such as work clothes or office supplies, are not considered special benefits, even if their cost is high. This means that providing employees with quality tools for work will not result in additional tax liability for the company. The same is true for, for example, birthday flowers or water for drinking in the office, which are generally not considered special privileges and can be treated as normal business expenses.
However, many other types of benefits, such as the payment of personal housing expenses or the provision of goods and services at below-market prices, fall within the definition of special benefits and must be declared and taxed accordingly. This is done on the TSD (personal income tax return) form in Annex 4.
Examples of special privileges include:
- Use of a company vehicle for personal travel.
- Payment for living space (e.g., providing a free apartment to a teacher if the place of work is more than 50 km away from home and the employee does not own property closer to home).
- Providing goods or services at prices lower than for regular customers.
- Paying for non-work related insurance (e.g., retirement insurance).
- Providing loans at a lower interest rate than what is available in the market.
- Buying goods or services at above-market prices.
- Failure to repay the loan provided.
- Paying for non-work related training (e.g. knitting courses).
However, not all benefits are considered special privileges. For example, flowers given on a birthday or water for drinking in the office are generally not considered special benefits and can be treated as normal business expenses.
Complexity of special benefits
The challenge in managing special benefits is to understand exactly which benefits and in what circumstances can be granted to employees without additional tax consequences.
For example, tuition fees may be a non-taxable special benefit if the course is directly related to the employee's activities in the company and contributes to his or her professional development. In such a case, the training costs may be included in general business expenses and will not be considered as income to the employee. However, if the training is not work-related, as in the case of a knitting course for an accountant, the cost of such courses will be considered a special benefit and will be taxable.
This emphasizes the importance of distinguishing between the personal interests of the employee and the interests of the business when assessing costs.
How to avoid paying unnecessary taxes?
To avoid unnecessary tax liabilities, employers need to clearly define benefit policies, including strict criteria that must be met for a benefit not to be considered a special benefit. For example, companies often set limits on the value of gifts given to employees or require that all training programs be approved by the HR department to ensure that they are professionally relevant.
Also, if a company provides special benefits, it is necessary to accurately calculate their value in order to correctly determine the tax base. For example, if a company covers the cost of renting accommodation for an employee, it is necessary to determine the market value of such accommodation in order to calculate the tax liability.
In addition, companies should carefully document all transactions related to the granting of special privileges in order to be able to support their actions in case of audits by tax authorities. This includes retaining all invoices, lease agreements and other documents that can be used to substantiate expenses.
In general, managing special privileges requires careful planning and knowledge of the legislation to avoid unnecessary tax costs and potential penalties. This is especially important for small and medium-sized businesses, where every euro counts and unexpected tax liabilities can have a significant impact on the financial health of the company
Entrepreneurs may also want to consider establishing a tracking and reporting system for special privileges to simplify accounting and ensure tax compliance. Such a system would help in managing tax risks and ensuring transparency to the tax authorities.
In conclusion, special benefits can be a valuable tool to support employees and strengthen corporate culture, but require careful planning and management. Understanding the intricacies of Estonian tax legislation will help entrepreneurs avoid unwanted tax consequences and maximize the opportunities offered by these incentives.