Hiring independent contractors from an Estonian company

  • Hi everyone,

    I'm interested in the practice behind hiring independent contractors for an Estonian company. How is it taxed, what is the most common practice. Contractors would work remotely and would not have business nor residency in Estonia. As far as I can understand I would pay contractors via accounts payable.

    Note: I'm particularly interested in B2B invoicing, if I can invoice an individual (as an independent contractor), and taxation around it.

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  • Hi Marko,

    The "Professional" plan from LeapIN would be one of the options for freelancers/contractors to work remotely for a company incorporated in Estonia or elsewhere. Feel free read more or sign up.

  • Marko,

    In case you hire an Estonian contractor for an Estonian company as a natural person, the same taxes are payable as in case of an employment contract, i.e. the following taxes are payable in case of a EUR 1 000 gross wage:

    1. Social tax (33% of the gross sum): EUR 330;
    2. Unemployment insurance contribution of the employer (0.8% of the gross sum): EUR 8;
    3. Pension fund contribution (2% of the gross sum): EUR 20;
    4. Unemployment insurance contribution of the employee (1.6% of the gross sum): EUR 16;
    5. Income tax (20% of the gross sum after deducing point 3 and 4 and an additional tax free EUR 170): EUR 158.8

    Therefore, in total, the expenses for the employer will come out to EUR 1 338 and the net proceeds to the employee will be EUR 805.2.

    In some cases, it is possible that the independent contractor operates through a company, whereby the total payout will form a much larger part of the total expenses of the parties. However, the Estonian Tax and Customs Board is keeping a close eye on such transactions so as to exclude any relationships which are in essence one of employment. Therefore, for example, in case you are the only customer of the independent contractor, the use of an intermediary company will most likely not prevent the obligation to pay full taxes of the amount payable.

    Moreover, even if you do decide to hire the contractors directly under a contract for services agreement, due care must be taken to avoid classification of the agreement as an employment contract.

    Information posted above is intended as a general guide and does not constitute legal advice.

  • Thank you Tark Grunte Sutkiene for this elaborate answer. If I may trouble you with a slight change, companies nor independent contractors would not be Estonian, namely they operate outside Estonia (could vary where) and their tax residencies (individual) are not in Estonia. That ought to change the requirements?

  • It should be treated as B2B. No taxation for international service in Estonia (It is taxed in some other countries). Let me check with our lawyer just in case.

  • When you need to calculate Estonian salary and tax in the future, following site is useful. http://palk.crew.ee/. Though it is in Estonian, google translate is good enough. So many Estonian people use the site.

  • In case the contractors are non-residents, the picture changes quite a bit. As a general rule of thumb, income and social tax are not payable for non-residents in case the work is done outside of Estonia. Under EU Regulations 1408/71 (Art 13(2)(a)) and 883/2004 (Art 11(3)a), the legislation of the place of employment are applied. For example, in case an Estonian company hires a Swedish resident who works in Sweden, the Estonian company is not liable for income and social taxes in Estonia. However, tax liability arises in Sweden, depending on the laws in force there.

    However, certain exceptions to the above may arise in case Estonia has entered into an international tax treaty. Estonia has a social insurance treaty with Finland, Latvia, Lithuania, Ukraine, Canada and Russia.

    Information posted above is intended as a general guide and does not constitute legal advice.

  • Tsutomu,

    I would actually recommend the calculator here. It is available in English and looks quite a bit better ;)

    Information posted above is intended as a general guide and does not constitute legal advice.

  • I mean it depends on whether contractor's tax residence is. It differs how the income is treated. Better to check with local tax or accounting consultants.

  • Thanks @Tark-Grunte-Sutkiene @Tsutomu-Komori, that's exactly what I needed to know. No taxation for Estonian company but contractors or contracting companies pay the tax in countries of tax residence, unless Estonia has an agreement with those countries that regulates it otherwise.

  • Marko, thanks for your uptick on my Anguilla Nest post! It meshes well with your discussion on taxation of contractors. Bear in mind that not only is the residence of the contractor significant... it is also crucial as to where the services are actually performed. An example would be a rock star from Anguilla performing at a concert in Tallinn. He or she would be subject to tax where those personal services are performed i.e. Tallinn. In contrast .. a digital nomad software engineer resident in Anguilla and doing his programming there for an Estonia company ... would not be taxable anywhere (unless of course he is an American citizen :-( ) Cheers, Lyn

  • Dear all,

    I have posted a wider introduction to taxation in Estonia here. Hopefully this clarifies some of the potential issues!

    Information posted above is intended as a general guide and does not constitute legal advice.

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