Changes in taxes. People on low income can apply for income tax rebate. The application for a rebate must be submitted with the personal income tax return to the Tax and Customs Board and the rebate will be paid by 30 June. The Tax and Customs Board will pay the rebate on the basis of the income earned in 2016 to the people on low income who comply with the conditions.
Approximately 100,000 adults whose annual income was less than 7,818 euros, i.e. up to 651 euros per month, and who worked full time for at least six months in 2016 meet the conditions. The full-time work requirement does not apply to people whose capacity for work is reduced. The amount of the rebate is up to 709 euros, but not more than the income tax paid in 2016.
Employers will be given the opportunity to also pay employees compensation free of social tax on the basis of a sick leave certificate for the second and third day of sick leave to the extent of 100 per cent of the employee’s average salary. At present, the compensation is free of social tax from the fourth day onwards. The basic exemption rate will increase to 180 euros in 2017 from the present 170 euros. The general income tax rate will remain at 20 per cent.
The additional tax free income of pensions will be increased to 2,832 euros per year or 236 euros per month. Alongside the general increase in basic exemption to 180 euros, this takes the tax-free pension to 416 euros, also guaranteeing the exemption of the average old-age pension from tax in 2017.
Exemption from income tax is extended to the benefits and allowances paid in the case of the death or reduction of the capacity for work of an ordinary official, assistant police officer, rescuer or person engaged in emergency situation work.
Rules of income taxation in 2018 (i.e. upon declaration until 31 March 2019).
- The general basic exemption of people earning low and average wages will increase to 500 euros per month in 2018. This amount will decrease from a certain level of income. The basic exemption is 500 euros in the case of a taxable monthly income of up to 1,200 euros. There is no basic exemption in the case of income that is 2,100 euros or more.
- The additional threshold of deducting home loan interest in the amount of 300 euros will be established within the threshold of 1,200 euros that has been applied until now and will also be applied in the future. The threshold of 1,200 euros will apply to training expenses, gifts, donations and loan interest.
- The joint income tax return of spouses will only be maintained in respect of the most common deductions. If there is no income or the income is insufficient, spouses can declare jointly their home loan interest, training expenses and additional tax free income for children.
The VAT of accommodation establishments will remain at 9 per cent in 2017.
The social tax rate will remain at 33 per cent.
Reverse taxation of the metal products mainly used in construction and the machine industry will be implemented as of 1 January 2017 in order to reduce VAT fraud. The risk of tax fraud is high in the sector and it has therefore been difficult for companies who conduct their business honestly to remain competitive. The use of buffer companies that note add VAT to their invoices, which is not paid to the state, is common. The acquirer of the goods declares the VAT indicated on the invoice as input VAT and reduces the VAT calculated on its taxable turnover by the same amount.
Increasing the alcohol excise duty is planned for February and July 2017. The excise duty on one per cent of ethanol by volume per litre of beer will increase from the present 8.30 cents to 9.13 cents in February 2017 and to 15.52 cents in July. Example: if a 0.5-litre beer costs 1.09 euros at present, then its price after the excise duty increase in February only considering the excise duty part of the price will be 1.11 euros, and after the excise duty increase in July it will cost 1.29 euros. The excise duty on wine and fermented beverages with an ethanol content of up to 6 per cent by volume per litre will increase from the present 48.55 cents to 53.41 cents in February and to 77.44 cents in July. Example: if an apple cider with an alcohol content of 4.5% costs 1.29 euros at present, then its price after the excise duty increase in February would be 1.32 euros, and after the excise duty increase in July it would cost 1.46 euros.
The excise duty on a litre wine and fermented beverages with an ethanol content exceeding 6 per cent by volume per litre will increase from the present 111.98 cents to 123.18 cents in February. Example: if the price of a wine (75 cl) with an alcohol content of 12% is currently 5.79 euros, then after the increase in excise duty it would be 5.89 euros. The excise duty on strong alcohol will increase by 10% every year until 2020. Example: if a vodka (1 l) currently costs 20.90 euros, then after the increase in excise duty early in the year its price would be 21.94 euros. The reduced rate of independent small breweries will be increased. Instead of the present 3,000 hectolitres, the reduced rate (50% of the excise duty on beer) will be applied to production of volumes of up to 6,000 hectolitres. The production volume of an independent small brewery in the previous year will be considered instead of the volume of the current year. Paying the difference in excise duty retrospectively is not required if the threshold is exceeded. Entrepreneurs need this to make the transfer from an independent small brewery to an ordinary brewery smoother in terms of expenses.
The excise duty on cigarettes and smoking tobacco will increase by 8 per cent from 1 January 2017. Example: a packet of cigarettes that currently costs 3.26 euros will cost 3.53 after the increase in excise duty, i.e. the amount of excise duty will increase by 27 cents.
The increase in the rate of excise duty on fuel that was planned for 2017 will be postponed from the start of January until the start of February. The excise duty on a thousand cubic metres of natural gas will increase from 1 January from the current 33.77 euros to 40.52 euros and the excise duty on a thousand litres of diesel fuel will increase on 1 February from the current 448 euros to 493 euros. The planned increase in taxes on diesel fuel, diesel fuel for specific purposes and light heating oil in 2018 is abandoned. Examples: excise duty currently comprises 0.465 euros of the price of a litre of motor petrol, which will increase to 0.512 euros; and excise duty currently comprises 0.448 euros of the price of a litre of diesel fuel, which will increase to 0.493 euros; and excise duty currently comprises 0.03377 euros of the price of a cubic metre of natural gas, which will increase to 0.04052 euros.
Other legal amendments
Important amendments have been made to the Investment Funds Act, which simplify the establishment of investment funds in Estonia. For example, an entirely new type of fund that can be established in the future is a trust fund, which in other countries is primarily used to manage venture capital investments. The act also increases competition on the pension fund market. The act favours the addition of new pension fund management companies and makes switching pension funds considerably cheaper for people.
Provisions that require banks to open payment accounts (current accounts) for consumers on request and provide services related to the accounts will be added to the Law of Obligations Act. In addition to opening an account, the services also cover depositing money in one’s account, cash withdrawal and initiation of direct debits, credit orders and payment card transactions. Transferring an account from one bank to another will also become easier.
Amendments have also been made in the Securities Market Act and Financial Supervision Authority Act Amendment Act to update the competencies of the Financial Supervision Authority and the supervision measures for a more effective prevention of abuse of the securities market. The act is based on the EU regulation that establishes the rules for prevention of abuse on the securities market (incl. the stock exchange). Market abuse means unlawful activity upon trading in securities, which damages the transparency and reliability of the market and consequently the interests of investors.
Two EU directives will be transposed into the Tax Information Exchange Act in 2017. The act will establish the obligation of annual country-by-country reporting for the large groups of companies operating in Estonia, whose annual revenues exceed 750 million euros. The deadline for transposition of the provisions of automatic information exchange in the area of country-by-country reporting of the European Union Administrative Cooperation Directive is 5 June 2017. Automatic information exchange will extend to the country-by-country reports of large groups from 2018. The amendments to the same directive pursuant to which the tax authorities of the European Union Member States will start to automatically exchange information about the binding preliminary decisions of tax authorities from 2017. Information exchange about preliminary decisions will not bring about additional obligations for entrepreneurs. However, the information exchange will also concern the preliminary decisions made earlier, since 2012. The deadline for transposition of the directive is 1 January 2017. The administrative cooperation between tax authorities in the European Union in the area of direct taxes is regulated by the directive on administrative cooperation in the field of taxation, on the basis of which Estonia automatically exchanges information about the salaries, remuneration of management board members, pensions and real property income of the persons of other Member States. Information about the various funds held in a foreign country will be automatically exchanged from autumn 2017.
The amendments to the Accounting Act that will enter into force as of 1 January simplify the requirements for accounting source documents and require the public sector to accept machine-readable e-invoices.
The draft act stipulates the possibility that a machine-readable e-invoice can be submitted to the public sector for goods or services as of 1 January 2017, and the act also stipulates the standard for e-invoices. An e-invoice is sent via an operator from one accounting software directly to another, and the recipient will no longer have to enter the data of the invoice manually. The state has created the e-Financials environment for small entrepreneurs where they can prepare and send e-invoices free of charge.
The amendments relax the requirements for accounting source documents such as waybills, receipts, certificates and contracts. In the future, the only mandatory information a source document must contain is the time, content and figures of the economic transaction. If the counterparty of an economic transaction of an accounting entity is an accounting entity, state accounting entity or foreign legal entity, the invoice submitted about the transfer of goods or the provision of the service must contain, in addition to the information specified above, the number of the invoice and the information that makes it possible to identify the parties to the transaction.
Also, the amendments release microentrepreneurs from the obligation to prepare accounting policies and procedures. A microenterprise is a public limited company belonging to the member of the management board whose assets amount to less than 175,000 euros and sales revenue is less than 50,000 euros, and whose liabilities do not exceed equity.
Budget and important figures
The minimum wage will increase to 470 euros per month and 2.78 euros per hour on 1 January compared with the earlier 430 euros per month and 2.54 euros per hour. According to the forecast of the Ministry of Finance, the average wage will increase by 5.5 per cent or to ca 1,200 euros. The daily rate of the unemployment benefit will increase to 4.86 euros in comparison to the previous 4.41 euros. The minimum monthly social tax rate related to the minimum wage of the previous year will increase to 430 euros in comparison to the 390 euros applied in 2016.
The average old-age pension will increase by 5 per cent or to ca 416 euros according to the forecast. The average old-age pension will remain free of tax and the additional tax free income of pensions will increase from the present 225 euros to 236 euros for this purpose. The support scheme for pensioners living alone will give 115 euros of support per year to 92,300 pensioners. Payment of the support is planned for next October. In comparison to 2016 state budget expenditure will increase in 2017 by 7.6 per cent or by ca 734 million euros to 9.66 billion euros. The general government budget is in a structural surplus with 0.2 per cent of GDP.
According to the budget, the state plans to use European Union and other foreign support in the amount of 961 million euros, which amounts to more than a billion euros with the state’s co-financing in the amount of 81 million. The investments made with the support of EU funds boost the economic growth of Estonia.
Defence expenses will amount to ca 2.2 per cent of GDP in 2017, which is the highest level of all times. The expenses related to the presence of allies are incurred in addition to the 2 per cent of GDP that is meant for the development of independent defence capabilities. The new programme of defence investments will start in 2018.
The biggest share of budget expenditure – 34 per cent or 3.28 billion euros – is spent on social protection, incl. the 1.67 billion euros spent on state pension insurance. The health insurance budget will increase by 66 million euros to 1.090 billion euros on the account of the improved collection of social tax. In addition to this, an additional 10 million euros will be allocated to the Estonian Health Insurance Fund for health insurance from the state budget in the next year.
The state expects to earn revenue in the total amount of ca 9.48 billion euros next year, which is 8.9 per cent or 780 million euros more than forecast for 2016. Total tax revenue will comprise 6.71 billion euros, which is 470 million euros more than forecast for 2016. This includes 2.73 billion euros of social tax or 157 million euros more than forecast for 2016, 2.1 billion euros of VAT or 170 million euros more than forecast for 2016 and excise duties in the amount of 1.08 billion euros or 113 million euros more than forecast for 2016.
Source: Estonian Ministry of Finance
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