The Estonian Tax and Customs Board pays special attention to the taxation of private individuals’ income arising from employment relations: income tax, social tax and other compulsory contributions. Income from transactions with cryptoassets is also taxable.
Combating Tax Evasion and Hidden Employment Relations
The aim of the tax authority is not only to ensure that wages accrued and paid to a private individual are taxed correctly, but also to prevent the concealment of employment relations. Some enterprises try to avoid social tax and other compulsory contributions by artificially reducing their payroll: key tasks are handed to affiliated legal entities, and employees formally provide their services to the enterprise through their own companies — consulting, management, design, copywriting and so on.
What Is “OÜ-tamine”
The best-known scheme for concealing employment relations is “OÜ-tamine”: the employer avoids labour taxes by ordering services from an affiliated private limited company (OÜ) — often, in effect, from itself. Such a practice may be treated as tax evasion.
Relying on the rulings of the Supreme Court, the Tax and Customs Board applies a set of criteria to establish whether a real employment relationship exists and, consequently, which tax liabilities arise from it.
Financial Security for Business: Accounting, Taxes, Compliance
Eesti Firma provides consulting and accounting services and will help you shape the financial and tax policies of your enterprise so that any signs of “OÜ-tamine” are ruled out, while service contracts that matter to your business are kept wherever they are commercially justified.
We help to distinguish between employment relations and the provision of services, and to account correctly for business expenses and for the taxation of wages, payments to board members and dividends. A transparent financial policy means complying with the legislation, accounting for income correctly and preventing the risks associated with tax evasion.
Boundaries of the “OÜ-tamine” Scheme
“OÜ-tamine” remains relevant in the context of the fight against paying dividends instead of wages. According to media reports, the aim of the tax authority was not to penalise the use of the scheme but to make it clear to entrepreneurs that there are firm rules on what is allowed and what is not. The Tax and Customs Board has taken only three enterprises to court for concealing the true nature of employment relations.
How OÜ Owners Evade Taxes: Insights from the Tax and Customs Board
According to the Tax and Customs Board, tax evasion is more often linked to something else: OÜ owners living off their companies’ funds. Lia Parve, head of tax audit at the Board, told journalists about two common schemes: concealing real employment relations under the guise of services provided between companies in order to reduce labour taxes, and using company assets for personal purposes. She noted that the former problem is not very widespread, while the latter can cause tax losses of over €10 million a year.
Taxation of Fictitious Service Transactions
A tax liability arises when legal entities create fictitious service arrangements in order to reduce labour taxes or avoid them altogether. In its rulings 3-2-1-82-14 of 12.05.2015, 3-3-1-25-15 of 11.09.2015 and 3-3-1-12-15 of 06.10.2015, the Supreme Court supported the position of the Tax and Customs Board and recognised such transactions as invalid for taxation purposes.
In the cases examined, private individuals received what were in fact wages not into their personal bank accounts but into the accounts of enterprises they owned (for example, private limited companies), where they were the sole shareholders and board members. Instead of an employment contract, a service contract was concluded between the companies. This allowed the parties to avoid labour taxes: the money went to the enterprise’s account, where the recipient could use it at their own discretion — for instance, to pay dividends or cover any expenses.
Supreme Court Confirms: Tax Evasion Schemes via OÜ Are Illegal
Similar schemes were used for management and consulting services: board members actually worked as private individuals, but the money was transferred to their companies’ accounts.
Example
A director earns gross wages of €3,500 under an employment contract. At current rates the take-home pay is about €2,786 (assuming a 2% second-pillar pension contribution), and the employer’s total cost including taxes is €4,683. If the companies sign a service contract with each other instead, the full €4,683 is transferred with no tax withheld and the director has the whole amount at their disposal. It is precisely this kind of arrangement that is regarded as tax evasion.
The Supreme Court confirmed that the tax authority has the right to intervene in such situations and to tax “service transactions” according to their real substance — hidden employment relations. Formal compliance of the contract with the law is not enough: the actual content of the work must match the terms of the contract. On the basis of the Court’s position, the Tax and Customs Board strongly encourages companies to review their tax practices and bring them into line with these rulings, in the interests of fair taxation and honest competition.
How Employment Relations Differ from Provision of Services
Employment relations are regulated by the Employment Contracts Act: a natural person (the employee) performs work for another person (the employer) under the latter’s management and control. The employer, for its part, must pay the employee the agreed remuneration and ensure the working conditions laid down in the contract or by law.
When deciding whether a relationship qualifies as employment, the courts establish:
- who organises and manages the work process;
- who determines the time, place and manner of the work;
- who pays for the work tools;
- who bears the risk related to performing the work;
- who receives the income or profit;
- whether the worker is integrated into the organisation and subject to its internal rules.
All the criteria are assessed together. Ultimately, the decisive factor is the degree of the worker’s dependence on the employer — in other words, their level of autonomy. It is a high degree of dependence that distinguishes an employment contract from other civil law contracts.
OÜ-tamine and Contract Reclassification: Key Legal Insights
At the same time, the widely used and perfectly legal authorisation agreements and contracts for services belong to the service contracts regulated by the Law of Obligations Act. As the Supreme Court has explained, the relationship between a management board member and the company is an authorisation (mandate) relationship. The mandatary must perform the mandate in person but may engage third parties to do so. In other words, a board member cannot delegate their powers and liability, yet may use the assistance of third parties in performing the mandate.
In transactions with companies affiliated with board members, it may turn out that the management and consulting services were in fact provided by specific private individuals rather than by the companies that signed the contracts. The legal consequence is that the specific individual is recognised as the other party to the contract.
In transactions involving employees, “OÜ-tamine” means that the relationship between the enterprise and the company affiliated with the employee is, in content and substance, an employment relationship. In that case the authorisation agreement is reclassified as an employment contract.
Taxation of Cryptoassets and Income from Online Platforms
Estonian legislation provides for tax control over income earned through online platforms and apps, as well as on the cryptoasset market. This considerably narrows the room for “OÜ-tamine” in these relatively new areas of selling goods and providing services.
Income earned through online platforms — from freelancing, rentals or the sale of goods — is also taxable in Estonia: depending on the situation, income tax, social tax, VAT and unemployment insurance contributions may apply. Online platforms in the European Union are obliged to report their users’ income to the tax authorities, and taxpayers must declare that income.
Selling, Mining, Staking: Crypto Taxation Explained
Income from cryptoassets is taxed in Estonia according to the nature of the transaction:
- gains from selling cryptocurrency are declared and subject to income tax;
- in mining, income tax is charged on the net profit, and social tax is added when the mining is carried out by a private individual rather than a company;
- paying for goods and services in cryptocurrency is treated as a sale of the cryptoasset and is likewise taxable;
- passive income from staking or lending is subject to income tax;
- tax is also payable on the sale of cryptoassets received as an inheritance or gift.
Private individuals declare the income on the basis of the market value of the cryptoassets at the time of the transaction.
Risks of “OÜ-tamine” Should Be Prevented and Minimised
Schemes for avoiding labour taxes, such as “OÜ-tamine”, expose companies to the risk of additional social tax assessments and of having employment relations declared hidden. The tax authorities and courts require a clear distinction between employment contracts and civil law relationships, and they reclassify fictitious transactions. Cryptoassets deserve particular attention: income from cryptocurrency transactions, including mining and staking, must be declared and is taxable. Activities carried out via online platforms and apps are taxed as well.
Proper Income and Tax Accounting with Eesti Firma Experts
Only compliance with the legislation ensures business sustainability and reduces the risk of penalties and tax audits. Eesti Firma provides consulting and accounting services: we help enterprises to distinguish employment contracts from service contracts, to build a tax policy free of “OÜ-tamine” risk and to account correctly for income, including cryptoassets and dividends.
