Estonian income tax deductible business expenses
Starting an Estonian company online has never been easier. At Unicount, we’ve reduced it to a simple three minute task. While working with Estonian company founders, we’ve noticed the same business expenses-related questions come up a lot immediately after their Estonian company is registered.
We put together this article with the most typical Estonian income tax deductible expenses you should know as a business owner and company board member. Those e-resident founders who are not hiring a professional accountant might miss out on the benefits and opportunities provided to them in the Estonian tax laws because they simply do not have sufficient knowledge.
The good news is that having tax-deductible business expenses is not related to your company having sales turnover. Some companies may be unprofitable for years while developing their products and services. The even better news is that a board member is entitled to similar income tax deductible business expenses as a company employee on monthly payroll.
Reasonable business-related expenses that are necessary for carrying out your business can be treated as company expenses in most cases and therefore are not triggering corporate income tax. We have tried to sort them into groups to make it easier for you to find the items you are searching for. We do need to say that this article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice.
Office-related tax-free expenses
Every company is allowed to have an office and carry all the necessary expenses related to renting, buying and renovating an office. The typical expenses are office rent, utility costs such as electricity, water and heating, cleaning, insurance, security etc. Home office costs can also be compensated in a certain ratio but this is something you should sync with your accountant first to be on the safe ground.
In your office, you probably also need office furniture, such as desks, chairs, shelves, cabinets, lamps, curtains, carpets, safes etc. Expensive items can be depreciated by your accountant monthly or annually to avoid your company share capital falling below the required minimum of 2500 euros. This needs to be done according to the accounting policies that the company needs to submit with the first annual report. Micro-companies do not need to submit accounting policies though and local generally accepted accounting principles apply (Estonian GAAP).
Tax-deductible office supplies range from toilet paper, towels and cleaning supplies to a water dispenser or coffee machine rent. Office expenses can also be pens, paper, calendars, first aid kits, newspapers, journals, business books, postage and reasonable office decorations.
Please note that having a physical office in any other country than Estonia may trigger local tax implications based on the rules applicable in your country of location.
Telecommunication and IT-related expenses
Whether you have an office or not, your company can pay for the internet, your mobile phone and the monthly plan, desktop computer, laptop, tablet, monitor, keyboard and all the necessary professional software and mobile apps. These devices may also need additional accessories such as a mouse pad, wrist rest, footrest etc.
You may also have a printer, scanner, copier, paper shredder, and accessories for these office machines. Office machines also need to be repaired and maintained regularly.
Most businesses nowadays also need to purchase web hosting, domains and cloud management services.
Services related tax-free expenses
All companies normally have some expenses related to having a professional accountant taking care of their tax and annual report. Sometimes you also may need legal services, business or tax consultation, coaching, secretarial or virtual assistant service.
Naturally, your company can pay bank and notary fees, and state fees to the Estonian government, including the state fee of 265 euros for your company registration, and professional indemnity insurance.
For the marketing and sales efforts, you would probably need someone to help you with online and offline advertising, design, and translation. We have heard that some people still love printed business cards. Most startups also provide their teams with necessary work clothes, such as a t-shirt or a sweater with a logo. Buying awesome gear for your team needs not be mixed with gifts that the company should not make above the 10-euro threshold.
The company can distribute samples of your product for promotional purposes, but this should not be mixed with gifts. You can buy and hand out a tax-deductible promotional gift if the value is less than 10 euros incl. VAT, such as a pen or a nice branded coffee mug.
Car-related tax-free expenses
Your company can pay up to 335 euros per month for car compensation if a personal car is used for business travel, but only if you keep a logbook that shows all the rides you have made for business purposes. The actual amount is calculated from the mileage so that you get 30 cents per kilometre.
Businesses can also consider the purchase price or lease payments of the car tax-deductible. There are some special VAT reclaim rules though depending on if the car is solely for business or mixed-use.
This also applies to all necessary car-related accessories and services including insurance, maintenance and repair. Mixed use would mean that the company car is used for personal rides and a special fringe benefits tax needs to be paid based on the car’s age and engine horsepower.
Team-related tax-free expenses
As an entrepreneur and company board member, you are entitled to attend at company expense all possible professional conferences, conventions, trade shows and training around the world. This also includes academic studies such as paid bachelor’s or master’s studies if they are necessary for performing the contractual work for the company. Your company can pay your membership fees to professional or business associations, online courses, e-books etc. All these would also apply to your employees.
You can have business lunches with existing or potential clients and partners up to the limit of monthly representation expenses, but the company representative’s share is taxable from the first cent. If you have no payroll taxes paid in Estonia the limit currently stands at 32 euros per month for the entire company. Your potentially awesome Christmas party with alcohol and food served to your team comes with a fringe benefits tax payable by the 10th day of the following month. The fringe benefits tax is currently the Estonian income tax of 20% plus 33% social tax calculated from gross amounts including VAT.
Important to know is that examination by an occupational health doctor, the procedures prescribed in writing by an occupational health doctor and the cost of glasses determined by the occupational health doctor can be covered, but it is necessary to prove deterioration of eyesight, based on the previous prescription for comparison. There is also a tax incentive for health and sports expenses with a limit of 100 euros per calendar quarter per person.
Employers can also carry the cost of Estonian voluntary pension insurance for their employees or board members, but it is taxable with social tax. No personal income tax applied though.
Business travel-related tax-free expenses
Companies can cover tax-free travel expenses related to renting accommodation and transport and pay per diem daily allowances to the employees and board members. This also includes travel agency services and public transport tickets necessary for the performance of duties. Per diem allowance can be up to 50 euros net per day for the first 15 days of international business travel per month, then up to 32 euros per day. A minimum tax-free allowance of 22.37 euros per day is payable when you are on a business trip outside of Estonia, but it can be reduced when the company covers the cost of meals. There is no daily allowance for domestic travel within Estonia.
Your company can also pay for transport if a team member travel to work from further than 50 kilometres and accommodation if the person lives more than 50 kilometres away. As of January 1, 2020, the cost of public transport tickets necessary for getting to work will not be taxed as a fringe benefit.
Estonian income tax exempt donations
Estonian limited companies can make tax-free donations to Estonian NGOs and foundations included in the tax office list of income tax-exempt organizations. The tax-free donations have annual limits though, so your donation needs to be below 3% of the amount of annually paid gross wages in Estonia or below 10% of the profit of the previous calendar year. Here are for example some NGOs supporting Ukraine.
Please note that donation is not the same thing as sponsorship, the purpose is to promote the company, and this already requires proof such as a contract which shows how your company is promoted for the money you pay.
Expense documents are mandatory
One important thing we would like to stress to conclude this article. In some countries, like the UK for example, your accountant might be ok with bank statements only to record your expenses such as London Underground fares or airline tickets. Not in Estonia.
Your accountant will require you to provide receipts and purchase invoices for each expense made with a company card or paid by you and then reimbursed from the company bank account. Everything else would be considered a director’s loan. If you are not registered for VAT in Estonia you might otherwise learn after a busy year with hundreds of small business expenses that your accountant is not willing to submit your annual accounts based on the bank balance statement.
Estonian Accounting Act actually requires you to keep all the documents for 7 years after the end of the financial year. That is why we recommend using good online expense management software such as Envoice. This lets you snap photos of your coffee bills while you are on the move and documents are immediately uploaded to a cloud for your accountant.
Thanks for reading
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