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Changes in the taxation of individuals engaged in business

The Estonian Parliament adopted on 13 December 2017 the draft law changes to the social tax and income tax legislation, which will introduce more favorable tax rules for individuals engaged in business (hereinafter „FIE“ – respective Estonian abbreviation). The most significant changes effective from 1 January 2018 include the following:

• The tax base of the maximum annual amount of social tax due by FIE will be reduced to tenfold monthly minimum wage per annum (instead of current fifteen times monthly minimum wage per annum). Thus, in 2018 when the monthly minimum wage will be EUR 500, the maximum amount of social tax due by FIE will be EUR 19 800 per annum.

• Children and adults, whose main activity is study in educational institutions, will receive relief from the obligation pay to minimum amount of monthly social tax.

• The calculation rules for the minimum amount of social tax by FIE will be changed so that the basis of calculation will be the days when FIE has been registered in the Commercial Register.

• FIE may reduce the minimum amount of social tax due to the temporary incapacity to work (i.e. sickness).

• FIE is entitled to calculate the estimated sickness compensation for the period of 2.-8. day of sickness or injury and deduct it from the business income subject to social tax.

• If FIE has no obligation to pay social tax in Estonia, then upon the calculation of business income after the deduction of expenses the respective figure will not be divided with 1,33.

• The social tax amount exceeding the business income of FIE can be carried forward to following tax years.

• If FIE has a permanent establishment in any foreign country, then the profits attributable to that permanent establishment will be exempt from income tax in Estonia.

• FIE will be entitled to make on a tax exempt basis health promotion expenses up to the amount of EUR 100 per quarter.

• FIE will be allowed to deduct documented meal expenses from its business income up to the amount of applicable daily allowances, if the business trip of FIE to the foreign country is related to his/her temporary business activities in that country.

• FIE will be allowed to deduct representation expenses up to the amount of EUR 32 per month (in addition to current limit – 2% from the business income).

• Like companies, FIE will be entitled to make tax exempt gifts for the purpose of business promotion, if the itemized value of such gift is up to EUR 10 (excluding VAT).

• The time period for carry-forward of losses by FIE will be gradually (year-by-year basis) increased from the current 7 years to 10 years. Thus, from 2020 FIE can deduct the expenses which exceed its business income within the following 10 tax years.