From 1 January 2021, several tax changes will become effective in the Income Tax Act and Taxation Act, in order to guarantee the income taxation of foreign employees working in Estonia under the term of hiring-out of labor. In the list of non-resident Estonian source taxable income, the provision prescribing the range of taxable employment income (§ 29 (1) of the Income Tax Act) will be amended, by replacing the criteria of „payer of income“ with „employer of individual“ (for maintaining the right to taxation also in circumstances, where the non-resident individual works in Estonia, but the person which makes payments to the individual is not related to Estonia).
In addition, new provisions will be added to the income tax legislation, according to which the user company of the hired employee will be deemed to be an „employer of individual“, if the non-resident individual performs his/her duties in Estonia as a hired employee at the Estonian resident user company, at the non-resident employer or at the permanent establishment. In substance, the concept of economic employer will be introduced in the Estonian income tax legislation, which effectively means that the exemption from Estonian income tax under tax treaties no longer applies to short-term employment income derived by non-resident hired employee, as the user company of hired employee will be treated as employer of such individual.
However, the user company of such hired employee will not be liable to withholding of income tax, as under the new provision § 40 (32) of the Income Tax Act the withholding obligation in respect of such employment income derived from working in Estonia will be imposed to non-resident hire company, which pays remuneration the hired employee, employed by the hire company for the purpose of hiring-out of labor in Estonia.
The non-resident person’s registration obligations with the Tax and Customs Board will be amended in the Taxation Act, under which the registration is required prior to commencing the activities in Estonia. Also, the list of such non-residents will include the non-resident company engaged in hiring-out of labor.
Therefore, the individual income tax obligation of the hired employee will subsequently create registration obligation for the non-resident company engaged in hiring-out of labor, as a result of which it must be registered as a non-resident employer prior to commencing its activities and it must enter its hired employees to the Estonian employment register. If the non-resident intends permanently to provide services related to hiring-out of labor in Estonia, then it must register in Estonia its permanent establishment, unless it has already registered its Estonian branch in the commercial register.
Please see also the webpage of the Estonian Tax and Customs Board: https://www.emta.ee/eng/business-client/registration-business/non-residents/taxation-salary-and-wages-foreigners-estonia
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