The current economic challenges, such as high inflation, scarce resources and pressures to increase profitability, continue pushing businesses towards a global dilemma: either motivate your workers to stay on with a pay rise and then say goodbye to your profit, or cancel your plans for higher pay and perks and then lose skilled workers. This dilemma might have you looking for some more efficient types of employer’s financial support with a low or no tax burden, such as non-taxable fringe benefits. This article offers an overview of exempt fringes and other useful tools employers can use to support their workers in the Baltic States.
As the Great Resignation goes on, the international labour market has become increasingly unstable as a result of the pandemic and high inflation rates. Supporting the financial wellbeing of your workers is crucial to helping them with the rising cost of living, which has caused them a lot of stress already. A lack of support causes tension among workers, with recent surveys failing to provide the desired consolation: workers are insisting on a pay rise. Moreover, PwC’s survey “Global Workforce Hopes and Fears” shows that 71% of workers consider leaving for another job where they will earn more. So the employers need to hold all the cards to satisfy their workers and stay profitable at the same time. Under these circumstances, exempt fringe benefits are the golden mean, as they can play an important role in motivating your workers to keep working for your company without any further tax liabilities. This means the same corporate budget gives the worker a higher net benefit.
The Personal Income Tax (PIT) Act prescribes a range of tax-free benefits employers can provide to their workers. Fringes that are exempt from PIT are also exempt from social insurance contributions (SIC). Here’s a list of common exempt fringes:
Apart from a tax exemption, it’s also possible to provide several fringe benefits with a lower tax exposure, e.g. a company car that’s subject to a special monthly tax, or a car rented from a worker paying a 10% PIT on the agreed rent. Under the PIT Act, workers may also be rewarded for activities that are covered by royalty rules. This applies if a worker engages in intellectual work, with a reduced tax rate of 25% covering PIT and SIC (up to EUR 25,000 in royalties a year) or 40% (over EUR 25,000). There are plans to require all royalty recipients to register their economic activity from 2024, but there is also a chance that the current rules will still apply. Taxpayers will then choose to pay taxes under general procedure (PIT plus SIC). Opting for the microbusiness taxpayer scheme will mean the same tax exposure as currently.
The Estonian Income Tax Act provides for several benefits a worker may receive from their employer free of tax if certain conditions are met. Fringes provided in this way are not taxable in the worker’s hands. Here’s a list of common exempt fringes:
1) The worker’s home is at least 50 km away from work and they don’t own any residential property located closer to work, and these conditions are met throughout the period of accommodation.
2) The worker’s accommodation expenses are up to EUR 200 per calendar month in the case of Tallinn or Tartu, and EUR 100 in other cases.
Lithuanian PIT rules list several benefits that may be provided to workers free of tax. Some of the most popular exempt perks are:
Each Baltic country has its own range of exempt fringe benefits, which are subject to various restrictions on their use, including limits and other specific conditions. It’s important to note that the diversity of fringes is becoming increasingly popular among workers, which requires today’s benefits packages to be flexible and adaptable to each individual worker. Employers should consider all opportunities that allow their workers to make the most of tax-free perks, while paying particular attention to statutory conditions. To avoid tax risks in awarding fringes, you are advised to reach out to tax professionals, who will help you design a compliant benefits package that meets today’s standards.
Read more about flexible fringe plans in our May's article.
The rapid evolution on a global scale leads to changes in all areas of life. What was once seen as something new and innovative has now become a standard, or it’s out of date already and in for a change. The evolving business environment entails changes to the workplace and workers’ needs, which means new challenges for employers. Diversity of benefits available to employees is becoming a key factor in assessing the workplace. According to statistics, activities promoting diversity of benefits have a positive effect on any company’s economic activity and worker productivity. Especially during the post-pandemic period, we could see employees expecting from their employers a package of benefits that’s flexible and tailored to their needs. We have written before about the advantages of flexible reward schemes. In this article we are looking at a new technology solution that will help companies improve their benefits packages by tailoring those to the desires of their employees.
Globalisation means it’s common for companies to have their corporate clients and various procurement projects in countries other than their main place of business. To properly benefit from foreign procurement projects, it’s important to assess not only the benefits but also risks associated with such business opportunities, particularly tax risks. If your company has a permanent establishment (PE) in a foreign country, it’s important to be aware of the corporate income tax and payroll tax implications of operating there. In this article, we take a look at employment tax risks and key issues to consider.
Employee stock ownership plans are becoming increasingly popular as a way to boost staff motivation in companies around the world, including the Baltic States. The popularity of stock options is due to how they benefit both the company and the employee. Stock options give employees the right to receive or buy shares in their company after a specified period and for a price below the market value. The company benefits by having employees who are willing to work towards its goals and increase its stock value. Since the national rules for taxing this fringe benefit vary from country to country, it’s important to review the tax laws of Lithuania, Latvia and Estonia.
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