The government on Thursday green-lit amendments to the Aliens Act, Income Tax Act and Taxation Act, to prevent abuse of employment rules.
The amendments seek to reduce the companies who evade paying tax on their workers and to implement a required average monthly gross salary.
Finance Minister Martin Helme said: "Today, unfortunately, there are frequent cases in certain sectors where workers from a foreign agency are working at an Estonian company, but the agency is not paying taxes on them and is thereby offering its services at a cheaper rate."
"This situation is detrimental for both our business environment as well as tax inflow, and in fact also for the foreign workers brought here," the minister said.
The Ministry of Finance said the problems is that when a Polish agency, for instance, hires a Ukrainian laborer, who is sent to Estonia for work for less than 183 days, the wages of such persons can be taxed only if the employer that pays remuneration to the person is also in Estonia.
Poland, on the other hand, has no right to tax the wage of a resident of Ukraine, as the work was not done in Poland and the recipient of the remuneration is not a resident of Poland.
The only country entitled and having the possibility to tax wages for work in such a case is Ukraine. Payment of tax now depends on the Ukrainian resident and their tax-abidance, as the tax authorities of none of the three countries have information about the payment and receipt of remuneration for work. In conclusion, a situation like this is bad for all the countries involved.
In accordance with the amendments, the provider of foreign labor must in future register with the Estonian Tax and Customs Board both itself as well as their non-resident agency workers.
The draft amendments would not change the obligation to pay social security contributions, which have to be paid under other laws and the European Union regulation. The amendments to the Income Tax Act and the Taxation Act set out no additional obligations for the Estonian user company.
Since many non-resident employers at present do not register themselves with the Estonian Tax and Customs Board, it is difficult for the latter to objectively asses the size of tax losses arising from the use or misuse of foreign agency workforce. Also, the Tax and Customs Board is unable to check all workers and business operators as part of oversight activities.
Spokespeople for the government said that the activity of a foreigner working in Estonia must also comply with the legal basis and purpose of their employment.
It is now up to the employer to prove their employees' legality to work in Estonia which will apply for both short-term third-country nationals and agency staff. They must also make sure they work in accordance with the terms and conditions of their contract.
In the future, failure to comply with this obligation may result in the company being held liable and fined, up to €300 for per person and up to €32,000 euros for legal entities. The same rates currently apply.
Verification of the legal basis for staying and working in Estonia can be done via e-inquiries on the Police and Border Guard Board's website. If the employee does not have a legal basis for employment, it is possible to apply for a foreigner's short-term employment registration electronically through the self-service environment of the Police and Border Guard Board.
The purpose of the amendments to the Income Tax Act and the Taxation Act is to ensure that the income tax liability of all companies providing labor rental services in Estonia and of persons working in Estonia is as similar as possible.
As a result of the amendments, the right to tax the salary of non-residents working in Estonia will be clarified and the obligation for non-resident entrepreneurs with employees in Estonia to be registered with the Tax and Customs Board and withholding income tax from salaries will be imposed.
The shortage of qualified workforce and skilled workers in Estonian economic sectors has led to increased demand for foreign labor by entrepreneurs. This, in turn, has led to some employers failing to comply with the terms of employment or the wage criterion stipulated in the Aliens Act.
Editor: Helen Wright