Estonia Payroll and Tax Overview

Investing in Estonia

Located in Northern Europe, bordering the Baltic Sea and Gulf of Finland, Estonia has a competitive economy and is continually recognised for being a world leader in human capital and for its unique digital capabilities. The country is one of the most liberal economies in the globe, ranking 18th out of 190 in the 2019 ‘World Bank’s Ease of Doing Business’ index. The Estonian government fully encourages foreign investment and welcomes a variety of key industry sectors, including software and hardware development, blockchain, logistics, risk capital, mechanical engineering and cyber security.

The country has one of the highest literacy rates in the world (99.9%), almost everyone in Estonia speaks a foreign language, most commonly English or Russian. With a highly educated and productive workforce, workers hold jobs in both the private and public sector. With this in mind, investors coming to Estonia from overseas will benefit from hiring Estonian employees, no matter the business sector.

Registering a Company and Establishing an Entity in Estonia

Estonia is the first country in the world to introduce e-Residency, this is thanks to the country having the most advanced digital society in the globe. E-Residency allows anyone in the world to base their business and finances in Estonia and have full access to Estonia’s digital infrastructure. Foreign investors are also granted the same business rights as Estonian citizens.

Unlike many other countries in the world, a company can be registered and established in Estonia within a few hours from nearly anywhere in the world. There are various types of business entities in Estonia, these include Private Limited Companies, Public Limited Companies, General Partnerships, Limited Partnerships, Sole Proprietorship and Commercial Association.

Private Limited Companies (OÜ) - This is the most popular entity among both Estonian residents and e-residents. Share capital is divided into private limited shares and is liable for the performance of its obligations with all of its assets, meaning a shareholder is not personally liable for the obligations of the company. Share capital must be at least €2,500 and there must be at least one founder of the company.

Public Limited Companies (AS) - This type of company is liable for the performance of its obligations with all of its assets, shareholders are not personally liable for the company’s obligations. Share capital must be at least €25,000 and there must be at least one founder of the company.

General Partnerships (TÜ) - The partners within this type of company will operate under a common business name and are mutually liable for the obligations of the general partnership with all of their assets. There is no minimum share capital and there must be at least two founders of the company.

Limited Partnerships (UÜ) - The partners within this type of company will operate under a common business name and at least one person (general partner) is liable for the obligations of the limited partnership with all of the general partners’ assets, and at least one person (limited partner) is liable for the obligations of the limited partnership to the extent of the limited partners’ contribution. There is no minimum share capital and there must be at least two founders of the company.

The Sole Proprietorship (FIE) - Arguably one of the simpler business entities in Estonia, a sole proprietorship is established by any natural person who opens a company on their own. The owner is fully liable for all debts and obligations of the company and must be registered with the Central Commercial Register before engaging in any business activities.

Commercial Association (ühistu) - This type of entity operates with the purpose to support and promote the economic interests of its members through joint economic activity in which its members participate. An association is liable for its obligations with all of its assets and members are not personally liable for the commercial association’s obligations unless otherwise agreed. Share capital must be at least €2,500 and there must be at least two founders of the association.

Business Banking in Estonia

It is not mandatory to make employee salary payments and third-party authority payments from an in-country bank account.

Generally, banks are open to the public from 9 am to 5 pm from Monday to Friday in Estonia. However, you can do most transactions online and more people choose to do so with 99% of banking transactions taking place online.

What are the Working Days & Working Hours in Estonia?

For employees over the age of 18 years old, the working week is Monday to Friday, eight hours a day (40 hours a week). By law, working time cannot exceed 12 hours per day or 48 hours per week. Lunch breaks should last from 30 minutes to an hour.

Basic Facts about Estonia

Official Name: The Republic of Estonia

Population: 1.325 million (Eurostat, 2019)

Capital: Tallinn

Official Language: Estonian (Russian, English and Finnish are also widely spoken)

Major Religion: Christianity

Monetary Unit: Euro (since 2011)

Main Exports: Electrical and machinery equipment, wood products, mineral fuels (including oil) & vehicles

GNI per Capita: US $23,181 (World Bank, 2019)

Internet Domain: .ee

International Dialling Code: +372

The tax year runs from 1st January to 31st December.

Estonia has one of the most competitive tax systems in the globe due to its relatively low tax rates and lack of corporate income tax on retained and reinvested profits. In addition, taxes can be declared online alone.

Individual Income Tax in Estonia

Estonia is known for its proportional income tax system and the standard rate for everyone is 20%. This flat rate means that income earners keep the larger portion of their salary for themselves, unlike other neighbouring countries such as Sweden and Finland. Employers withhold taxes from employees’ gross salary each month, meaning there are no additional payments or filing obligations for the employee.

Residents of Estonia are liable to tax on their worldwide income, regardless of the origin of the income. An individual is considered a resident of the country if their place of residence (the place they reside permanently or primarily) is located in Estonia or if they have lived in the country for at least 183 days over a consecutive 12-month period. Non-residents are only taxed on the income they earn within Estonia.

Corporate Income Tax in Estonia

A tax rate of 20% (reduced to 14% for regular dividends) is applied to distributed profits and there is 0% tax on retained and reinvested profits. This is one of the reasons why Estonia has ranked first in the ‘International Tax Competitiveness Index’ for seven consecutive years.

The tax period for corporations is a month, income tax must be returned and paid by the 10th day of the following month.

Social Tax in Estonia

Employers are obliged to pay social tax at a rate of 33%, 20% for social security and 13% for health insurance. In addition, unemployment insurance must be paid on an employees’ gross salary at a rate of 0.8% and an additional 1.6% is withheld from an employee’s salary.

There is always a minimum monthly obligation for social tax to be paid, as of 2021, it is €584. All Estonian registered employers must pay social tax on all payments made to employees, unless specifically exempt by law.

New Employees in Estonia

The hiring process in Estonia is relatively straightforward. All employees (unless they are an independent contractor) must sign a written work contract with their employer and this should be securely kept by the employer for at least a decade after its expiry. The contract should contain the below details:

• Employer and employee names, address and registry code
• The date of entry into the employment contract and the time of commencement of work by the employee
• Official job title
• Job description
• Workplace location
• Wage (in euros)
• Working hours
• Annual leave entitlement
• Notice period
• Workplace policies
• Other additional benefits

Despite English being commonly spoken in the country, all documents should be translated into Estonian.

Employers are responsible for ensuring employees are eligible to work in the country and can face a fine of up to €32,000 for not registering a worker as an employee. EU citizens are permitted to work in Estonia provided they get a right of residency; however, temporary residents must have a work permit.

Normally, there is an up to four-month probation period for new employees. As a general rule, employment contracts are concluded for an unspecified period.

The minimum hourly wage as of 2021 is €3.48 (gross) and the minimum monthly wage is €584 (gross).

Leavers in Estonia

Should an employer have grounds to dismiss an employee, the notice period will depend on how long the employee has been with the company:

Up to one year = Two weeks

One to five years = One month

Five to 10 years = Two months

10+ years = Three months

In the event of gross misconduct, the employment may be terminated with immediate effect.

If an employee is dismissed due to redundancy, the employer must pay them one month’s average wage. If a fixed term contract is ended early due to redundancy, the employer must pay what the employee would have been entitled to. If an employee has been with the employer for between five to 10 years, they are entitled to an additional one month’s salary from the Unemployment Insurance Fund. If an employee has been with the employer for 10+ years, they are entitled to two months of additional salary from the Unemployment Insurance Fund.

If an employee wishes to terminate their employment contract, they must give their employer at least one month of notice.

Regardless of how the contract is terminated, the termination must be presented in writing.

It is legally acceptable in Estonia to provide employees with online payslips.

Payroll reports must be kept for at least seven years.