Which expenses the Estonian company can pay for?
There are some questions which our clients have always asked us throughout the years. One that usually pops up is about fringe benefits. Below, we will explain what kind of expenses the company can cover, and which expenses are taxed. But before we go forward, let’s break down how the fringe benefits are taxed.
Fringe benefits are taxed with the income tax and the social tax. Let’s say your employee gets a benefit in a net worth of 100€ (for example, you buy him or her dinner for the birthday). As this is a net sum, then the gross benefit is 125€ (income tax added). You also have to pay the social tax, which is 33%. This amounts to 41,25€. So the total cost for you will be 166,25€. The nice gesture to your employee just got a lot more expensive.
Fringe benefits can only be the benefits that are provided to the people related to the company. Employees, members of the management body, husband or a wife of an employee, close relatives etc. A fringe benefit is something that can be measured with a monetary value. For example, if you are selling watches, and you give one to your employee for free, then this sort of benefit will be taxed according to the real value of that watch.
It’s important to differentiate which benefits are taxed. For example, if you’re buying a laptop for your employee. and this laptop is used for work, then this is not a fringe benefit. This is a reasonable and necessary tool in order to perform the work assignments. Same goes for working clothes and other necessary equipment which is needed in order to successfully do the work. For example, if your employee or you, as a director of the company, will travel to a conference or a sales meetings, then flight tickets and hotel accommodation is a business expense. However, if the accommodation will be at a luxury spa, then it can be considered an unnecessary expense, and part of the cost may be taxed as a fringe benefit.
Let’s say you’re running a marketing agency. If you send your employee to Google Ads courses, it’s a business expense. If you’re sending the same online marketer to a beer brewing course, then this is a fringe benefit. Brewing has nothing to do with the business (unless…perhaps you have a client, a brewer, who needs copywriting services and in order to do that, you have to learn some basics first..).
Additionally, loans with an unreasonably low (or no) interest, with unreasonably long deadlines to your own employees or related persons are considered as fringe benefits. However, if you as a shareholder will give a loan to the company without interest, then no tax risk arises from the transaction.
Another type of expense is a non-business related expense. This can be buying gifts to the business partner – though in some jurisdictions it’s a non-taxable expense, then, unfortunately, in Estonia, it’s taxed with the income tax (no social tax). Or, if you’re giving a loan to another company with an unreasonably low (or no) interest, with unreasonably long deadlines, then this can be seen as a hidden profit distribution, and taxed with the income tax (25% on net amount).
To conclude, it’s not always obvious whether something is treated as a fringe benefit or not. If you have any doubts, it’s always wise to consult with your accountant first. This will help you to minimise the tax risks. In some regards, your accountant should think like an investor. Minimise the risk, maximise the benefit – this is our approach at Comistar when dealing with the tax matters of our clients.