Taxation of foreign managers in Estonia

Foreign members of control organs of Estonian companies may face income tax in Estonia

Already since 1 January 2015 directors’ fees paid to non-resident board members of an Estonian company are subject to taxation in Estonia, regardless of whether those fees are paid by a resident or non-resident person. The essential element for determining taxation is the fact that remuneration is paid for carrying out directors’ duties for the benefit of an Estonian company or permanent establishment of a non-resident (irrespective of where the director`s duties are actually performed). Although some time has passed since the law was amended, in practice entrepreneurs still need reminding of it. It is quite common that non-resident companies have a subsidiary in Estonia that is managed by non-resident board members who receive remuneration based on a service contract that covers the manager’s services in several countries (for example in all three Baltic States or other countries where branch offices are held). In that situation, it is advisable to fix the proportion or amount of remuneration that can be allocated to Estonia. Failure to do so results in exposure to the risk that the Tax Authority will calculate the taxable amount at its own discretion. The Authority has suggested that, for fulfilling a non-resident`s tax obligations, a non-resident payer should register as a non-resident employer in Estonia and withhold taxes from payments. Alternatively, a non-resident payer could authorize other persons (e.g. an Estonian company) to act on its behalf or to make payments through an Estonian resident (i.e. the Estonian company could account for taxes in its own name). If only income tax is due on directors’ fees (i.e. the non-resident is covered by social security in another country), the recipient would be able to fulfill their income tax obligation by filing an annual personal income tax return (by 31 March of the year following the period of taxation). Relevant double taxation treaties should be observed.

Source: Estonian Income Tax Act, Tax and Customs Board

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