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COVID-19 in Estonia: The coronavirus in employment relations & taxes - April update

2020-04-03

It has now been announced that from Monday, 6 April 2020 employers will be able to apply for compensation payment from the state budget for March. The Estonian Unemployment Insurance Fund has explained by now the technical aspects of filing applications and responded to the more frequent questions asked by employers about applying for compensation.

Below you will find a brief overview of how to apply for compensation as well as some practical explanations and suggestions. Some of the requirements for claiming compensation are not yet completely clear. We will keep you updated as unclear circumstances are clarified.

We also outline the government measures to alleviate the tax burden on companies.

Government compensation for wages

Requirements for the employer

Please note that the employer must simultaneously meet at least two of the following conditions in order to be eligible for compensation by the state:

1) the employer’s sales have decreased, or in the absence thereof, the income of the employer has decreased by at least 30% in the calendar month for which the compensation is applied, based on a year-on-year comparison;

2) the employer cannot provide at least 30% of the employees with work to the agreed extent and the employer applies Art. 35 (payment of average wages upon inability to provide work) or Art. 37 (unilateral reduction of wages upon inability to provide work) of the Employment Contracts Act (ECA);

3) the employer has reduced the wages of at least 30% of the employees by at least 30% or to the minimum wage established by the Government of the Republic on the basis of Art. 37 of the ECA.

Compensated amount and time period

The Unemployment Insurance Fund (Fund) will pay compensation to an employee in the amount of 70% of the average wage of the employee, but not more than EUR 1,000 gross per one calendar month. The compensation will be deemed to be the wages paid by the employer, which the Fund pays to the employee on behalf of the employer and from the account of the Fund. As the compensation paid by the Fund is calculated on the basis of the employee’s wages over the past 12 months, the amount may not be 70% of the employee’s current wages. An employer must pay gross wages of at least EUR 150 to an employee who receives the compensation payment. The compensation payable by the Fund shall ensure at least the minimum wage established by the Government of the Republic in accordance with the working hours agreed under the employment contract of the employee together with the wages paid by the employer (EUR 150).

An employee is entitled to receive the compensation payment for up to two calendar months, as long as the employer meets the conditions specified above. Thus, the measure can be applied for two months between 1 March 2020 and 31 May 2020.

Applying for compensation

As of 6 April 2020, employers will be able to apply for compensation to be paid by the Fund to employees as part of the measure adopted by the government during the emergency situation. Until 9 April, employers will have to enter the details separately for each employee for whom they seek to claim compensation. From 9 April 2020, employers applying for compensation for 100 or more employees will be able import the data as an Excel document. Therefore, it may be reasonable for these employers to not submit their applications before 9 April 2020.

To apply for compensation, the employer must submit a separate application to the Fund for each calendar month, after having paid the wages to the employees, generally within five calendar days.

Applications can be submitted only through the Unemployment Insurance Fund’s e-service (https://www.tootukassa.ee/eng/tkauth/login) (however, please note that most of the instructions are provided in Estonian only). The application can be made on behalf of the employer either by a member of the management board listed on the registry card or by a person authorised by a member of the management board in the Fund’s e-service. Instructions for authorisation are available at the website of the Fund.

Important points regarding the necessary authorisation for the person submitting the application:

1) Please make sure that the members of the management board of your company have valid authorisation in the commercial register.

2) Where board members have joint representation rights, it is sufficient if one of them submits the application; this is according to a spoken statement by the Fund.

3) If the employer’s board members are foreign nationals who do not have an Estonian ID card or e-residency card and no representative of the employer (e.g. an accountant) is currently authorised to submit documents to the Fund, they must produce a power of attorney in hard copy for a representative who is an Estonian resident. According to a spoken statement from the Fund, the original copy must be submitted to the Fund, then for such employers the Fund has suggested to issue a power of attorney to its employee who has an Estonian ID card or e-residency card which enables access to the Fund’s e-services. Based on the power of attorney the employee would fill out and submit the application in the name of the employer. Thus, the employee must be provided also with all data and documents which must be submitted to the Fund in order to apply for the compensation.

We therefore recommend all our clients who find themselves in this situation to contact us as quickly as possible and we will help you prepare the necessary power of attorney (including in Estonian).

Establishing eligibility for compensation

When applying for compensation, the employer is required to explain which conditions it meets to be eligible for compensation. If the employer wants to rely on loss of sales, this can be done with a certificate from the Tax and Customs Board’s e-service (e-MTA). The loss of sales must also be separately explained (e.g. by explaining that the employer’s shop has been closed since 27 March 2020, or that the employer’s factory stopped working on 10 March 2020 due to the cancellation of orders).

The second condition of eligibility – inability to provide at least 30% of the employees with work in the agreed amount – has raised questions in practice. The government regulation does not specify the amount of reduction in workload necessary for this condition to be met. According to the Fund, there are no precise requirements for reduced workload; it is sufficient if the workload of at least 30% of the employees has dropped by a few hours, provided that the employer’s sales or income have also fallen by at least 30%.

Sick leave and holidays during the month for which compensation is sought

According to spoken comments by the Fund, eligibility is not affected if the employee has been on holiday or sick leave during part of the calendar month – compensation will still be calculated according to the same rules and not reduced.

Timing of the payments 

The Fund seeks to make the payments to employees within 5 working days of receiving a correctly submitted application. Therefore, employees may receive the compensation after their payday. We recommend that you inform your employees of this in advance.

Measures related to taxes

On 2 April 2020, the Estonian Government submitted the 2020 supplementary budget to the Estonian Parliament along with proposals for the application of economic measures related to the spread of the coronavirus.

Relief for the payment of tax interest

The Estonian tax authority will suspend the calculation of interest on tax arrears and the compulsory enforcement of tax debt will not be applied during the emergency situation. The relief is applied automatically to all tax arrears from 1 March 2020 until the end of the emergency situation. All tax returns should be filed in a timely manner and, if possible, tax liabilities incurred should be met. However, if funds are not available to cover all taxes, the tax debt accruing will not be subject to tax interest. The relief is applied to all tax arrears regardless of whether the debt has arisen within this period or earlier.

After the end of the emergency situation, tax interest will be reduced from 0.06% to 0.03% per day until 31 December 2021, and may be further reduced to 0% by the tax authority. The current law allows for the reduction of interest by up to 50% when deferring a tax debt, but the tax authority can reduce tax interest by up to 100% until 31 December 2021 at the request of the taxable person.

Deferred payment of taxes

In the case of solvency problems, taxpayers can apply for deferred payment of taxes in instalments. The Ministry of Finance has promised that the tax authority will be flexible in its debt proceedings and will grant the payment schedules for tax debts incurred during the emergency situation by up to 18 months without question. Requests for deferred payment should be made on your own initiative after filing your tax return rather than waiting for the tax authority to take action. Simple applications can be submitted and payment schedules for small tax arrears (up to 20,000 euros) could automatically generated online at e-Tax / e-Customs Board.

The tax arrears that have not been scheduled for payments in instalments can result in the loss of important advantages. Even if the tax authority waives interest payments and the compulsory enforcement of taxes due, tax arrears could still bring about the revocation of activity licenses or prohibit participation in public procurements. Tax debt may also discourage business partners and cause a further reduction in the number of future orders. Information on tax arrears is public and may be uncovered when due diligence measures are applied, although the tax authority has stopped disclosing this information on its website.

Abandoning the minimum threshold for social tax

The minimum threshold for monthly social tax will not be applied to salary payments made to employees for the period between March and May 2020. Instead, social tax will be paid on the actual gross salary below the minimum salary threshold. The minimum salary threshold for calculating social tax in 2020 is 540 euros, for which the minimum monthly amount of social tax for each employee is 178.20 euros. From March to May, this threshold will not apply and social tax may be lower if employees are paid a gross salary of less than 540 euros.

National health insurance is guaranteed for the duration of the emergency situation and the month following for all employees for whom at least the minimum monthly amount of social tax was paid prior to the emergency situation but not during the emergency situation.

Suspension of the payment of pension contributions

State payments to the mandatory funded pension system – the second pillar – will be halted from 1 July 2020 to 31 August 2021, and starting from October 2020, those subscribed to the funded pension may suspend their own payments as well. This arrangement does not, however, affect the tax liability of the employer, since pension contributions are withheld from the gross salary paid to employees. The arrangement will only benefit employees, whose net salary will be increased by the amount of the suspended 2% pension contributions, and the state, which will not make 4% payments from social tax for each employee into the pension fund. Until 1 July 2020, all regular tax and social security payments are still due of salary payments, only the minimum threshold for monthly social tax will not be applied if the gross salary falls below 540 euros.

Proposed indirect tax incentives

The VAT rate on electronic publications (newspapers, magazines, e-books) and audio books will be reduced to 9% – to the same level as the VAT rate on paper publications.

From 1 May 2020 to 30 April 2022, the excise duty rate on diesel fuel, natural gas, electricity and other fuels will be reduced.

The article was written by COBALT partner Karina Paatsi, senior associates Heili Haabu and Karli Kütt and associate Johanna-Britt Haabu.