According to the Estonian income tax legislation, the fringe benefit taxation applies to loans granted below the fair market value interest rate to the employee or member of the board or council, except if the interest at the moment of the payment of interest is at least twofold of the interest rate of the European Central Bank applicable to the main refinancing operations (from 1 January 2024, twofold amount is 9%).
Thus, if the fair market value interest rate of the respective loan granted is lower than twofold interest rate of the European Central Bank applicable to the main refinancing operations, then the taxable value of the benefit is the difference between the amount of fair market value interest rate and the effective interest rate to be paid according to the loan agreement.
However, if the fair market value interest rate of the respective loan granted is higher than twofold interest rate of the European Central Bank applicable to the main refinancing operations, then no fringe benefit taxation will arise in case of the loan granted, the interest of which is at least twofold of the interest rate of the European Central Bank applicable to the main refinancing operations.
For example, if the company has provided to its employee a residential mortgage loan at 7% interest rate and this corresponds to the fair market interest rate, then regardless of the fact that the effective interest rate to be paid according to the loan agreement is lower than twofold interest rate of the European Central Bank applicable to the main refinancing operations, then no fringe benefit taxation will arise, as the interest applied corresponds to fair market interest rate.
However, if the employer has provided to its employee interest free loan in the amount of EUR 5000 for a one-month period and the fair market interest rate of the respective loan is higher than twofold interest rate of the European Central Bank applicable to the main refinancing operations (9%), then the taxable value of the benefit is the difference between twofold interest rate of the European Central Bank and the effective interest rate to be paid according to the loan agreement. In such a case, the employer is liable to pay fringe benefit taxes on the basis of the 9% interest rate (5000 x 9% = 450 : 12 months = EUR 37.5), by declaring the benefit granted on the appendix 4 of the form TSD (code 4060 – 37.5, code 4061 – 37.5, code 4062 – 0).
According to the guidance of the Tax and Customs Board, for determining the fair market value of the loan interest for fringe benefit tax purposes, the household loans statistics of Eesti Pank (Estonian Central Bank) may be used (https://statistika.eestipank.ee/#/en/p/979/r/4354/4103).
In addition, the guidance of the tax authorities provides that the interest on such loans may be payable on a monthly or yearly basis. The fringe benefit should be declared for the month, when the employee is liable to pay the interest pursuant to the loan agreement. If the loan agreement does not prescribe the liability to pay any interest on the loan granted, then the value of the fringe benefit should be declared by the employer in the tax form for December, at the latest.
The additional information on the described topic can be found from the webpage of the tax authorities (in Estonian only): https://www.emta.ee/ariklient/maksud-ja-tasumine/tulumaks-ja-sotsiaalmaks/deklaratsiooni-tsd-esitamine/antud-laen
Please note that the above-described fringe benefit tax rules will not apply to interest rates of inter-company loans between related entities, for which transfer pricing rules on financial transactions are applicable.
Source: Estonian Tax and Customs Board