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Special tax rules for crossborder workers

Estonian Tax and Customs Board has published on their website a guidance on special income tax rules (in Estonian only: https://www.emta.ee/et/ariklient/tulu-kulu-kaive-kasum/muudatused/eesti-residentide-valisriigist-saadud-tootasu-ja) which are applied in Estonia during emergency situation caused by COVID-19 and subsequent restrictions in crossborder movement of individuals. Due to this, often individuals who worked in the foreign country, have not been able to return from their residence country to the country of work and vice versa. Effectively, these are exceptional tax rules which are applied in order to simplify the taxation of crossborder workers in circumstances, which are not related to the voluntary options of the employee or the employer.

With respect to the Estonian resident, who worked before emergency situation in abroad, but due to emergency situation or restrictions in movement had to work remotely in Estonia, the taxation of employment income will be effected as if there had not been any emergency situation. Thus, also the days worked in Estonia will be included in the days spent for employment purposes abroad and the remuneration received during remote work mode will be deemed to be taxed with foreign income tax in the meaning of § 13 (4) of the Estonian Income Tax Act, as if the individual had stayed for employment purposes in the foreign country at least 183 days during any consecutive 12-month period. In other words, in Estonian taxation such remuneration will be treated as tax exempt foreign employment income, which must be declared in the personal income tax return only for information purposes.

Also, in the above prescribed circumstances any fee or compensation paid instead of the foreign remuneration for employment will be subject to tax, as if there had not been any emergency situation. Therefore, in the above prescribed circumstances such payments paid to Estonian resident will not create to the foreign employer any liability to register itself as a non-resident employer in Estonia.

However, if the Estonian resident continues working remotely in Estonia also after the cancellation of restrictions in movement, then the general rules which applied before the pandemic will be effective to the taxation of his or her remuneration for employment. In such a case, the foreign employer would be required to register itself as a non-resident employer in Estonia.

The following special rules apply only to such non-residents, who are tax residents in countries, which have effective double tax treaty with Estonia:

• The non-resident, who prior to the emergency situation worked in Estonia for the non-resident employer and intended to work so for less than 183 days, but had to continue working due to emergency situation or restrictions in movement, is liable to Estonian income tax in respect of his/her remuneration only when he/she continues to work in Estonia also after the cancellation of restrictions in movement.
• If such non-resident can not leave from Estonia after the termination of work, then any compensation paid instead of remuneration is not taxed in Estonia, provided that he/she leaves from Estonia after the cancellation of restrictions in movement.
• If the non-resident worked prior to the emergency situation for the Estonian employer in Estonia, but due to emergency situation had to continue to work physically in abroad, then his/her remuneration received during the work performed abroad will not be subject to tax in Estonia.

Finally, the guidance also explains exceptions applicable upon the determination of tax residency of the individual. If the individual stayed during the emergency situation in Estonia, but had otherwise left Estonia without that situation, then the days spent during that time in Estonia will not be included in the calculation of 183 days of any 12-month consecutive period, which will be taken into account upon the determination of tax residency in Estonia. In addition, the days stayed in Estonia after the termination of emergency situation will not be accounted upon the determination of tax residency, if the move to the foreign country would be unreasonably expensive or complicated or if there would be applied a mandatory quarantine for the entering individual or any other restrictive measure in respect of the freedom of movement.