Table of Contents
As the year 2024 unfolds, Estonia’s regulatory landscape is undergoing a series of significant transformations, impacting various aspects of business, personal, and societal life. To ensure you are aware of these changes and navigate them effectively, this guide provides a comprehensive overview of the key regulatory updates that will take effect this year.
Whether you are an individual seeking to understand the implications of new tax laws or a business owner navigating the complexities of VAT adjustments, this guide provides a clear and concise overview of the changes that will impact you.
*Please note that this overview only presents the general outlook of these said changes. For tailored advice or further inquiries, don’t hesitate to contact us.
Personal income tax changes
On 01.01.2024, several changes in the Income Tax Act (ITA) are going to take effect. These changes are made in connection with a broader tax reform taking place in Estonia.
Pursuant to the ITA, natural persons have the right to a basic exemption deductible from their income. In addition to that, natural persons also have increased basic exemptions under certain circumstances. The amendments to ITA restrict the rights of natural persons to have increased basic exemptions. Namely, natural persons will be deprived of the right to increased basic exemption in the following cases:
- Upon provision of maintenance to children
In the ITA currently in force, one resident parent or guardian of a child or another person maintaining a child may deduct increased basic exemption from their income, provided that they maintain two or more minor children. In the eyes of the legislator, it is more efficient to support families with multiple children by granting family allowances. Therefore, persons will be deprived of the right to increased basic exemption upon provision of maintenance to children, and they will instead receive family allowances.
- Increased basic exemption for spouse
In the ITA currently in force, a resident natural person has the right to deduct an increased basic exemption from their income, if their income in total does not exceed the threshold set forth in the ITA. The provision allows persons to have an increased basic exemption if their spouse receives little to no taxable income and the spouse cannot utilise the basic exemption deductible in full. The legislator has decided that specific allowances based on real needs are more effective and therefore, this provision does not fully serve the purposes of natural persons.
- Housing loan interest
The right to deduct interest on housing loans was introduced with the aim of simplifying access to housing loans and thus access to new housing. The right to deduct interest on housing loans has not served its purpose, as the tax deductibility of interest has already been severely restricted and is limited to €300 per year. By repealing this provision in the ITA, the state presumes that it is able to put the money freed up to better use.
It is crucial to note that these amendments are going to affect tax deductibles from 2024 and onward. However, natural persons will still have the right to deduct these increased basic exemptions in their income tax declaration submitted in 2024, regarding income received during the year 2023. Following that, the persons shall not have the right to use the repealed increased basic exemptions starting from tax declarations submitted in 2025 (income received in 2024) and onwards.
Natural persons shall retain the right to increased basic exemptions for tuition fees and donations up to 1200 euros, but not exceeding 50% of the taxable income in Estonia. If the income is insufficient to cover the full amount of educational expenses, the unused portion can be transferred to a spouse or registered partner, provided that a joint property marital relationship existed during the tax period.
Value added tax (VAT) changes
From January 1, 2024, Estonia will increase its standard VAT rate from 20% to 22%. This rise in VAT is expected to have significant implications for businesses, particularly in terms of cash flow management and pricing strategies. Companies will need to adjust their accounting systems and consider the impact on overall profitability. In light of this change, two transitional provisions have been introduced in the law.
The first provision allows cash accounting users to continue paying VAT at the old rate of 20% until December 31, 2025, for goods or services delivered after December 31, 2023, if the invoice was issued and the goods were dispatched or made available, or the service was provided before January 1, 2024.
The second transitional provision relates to transactions under long-term contracts, particularly those involving real estate. Taxpayers are permitted, until December 31, 2025, to apply the old VAT rate of 20% for transactions of taxable goods or services under written contracts signed before May 1, 2023. This is applicable if the contract stipulates that the price of the goods or services includes VAT or is subject to VAT at the 20% rate, and the contract does not foresee any price adjustments due to potential changes in the VAT rate. Here are some examples to help you understand what you should take into account when calculating VAT from the new year.
Navigating tax changes requires caution due to the complexities involved. Are uncertain about the new tax implications for you or your business? Do not hesitate to reach out to our Managing Partner, Merlin Seeman.
COMMERCIAL CODE CHANGES
Reserving a business name
On 01.03.24, the possibility to reserve business names opens up in the Estonian Commercial Register when the Commercial Code §15.1 enters into force. It is possible to reserve a business name before registering a company and also in case of changing the business name of an existing company. The state fee for reserving a business name is 150 euros.
The requirements for the business name to be reserved are the same as for any business name: it must be distinct and not violate any trademark owner’s rights. While making an application for the reservation of a business name, the applicant must also state the field of activity of the entity the business name is to be used for and the legal form of the company. The registrar shall make a decision on the permissibility of the business name reservation. It is important to note that the reserved name cannot be changed after the decision has been made.
Upon making the application with the reserved name, the registrar shall check whether the data in the application and in the reservation are a match. A business name can be reserved for up to six months, extendable once by three months for valid reasons. The same person cannot reserve the same name again to prevent malicious reservations. If the company with the reserved name is not registered within the validity period of the reservation, the registrar will delete the reservation on their own initiative.
For use of the reserved name by other persons, the person must obtain consent, which must be included in the application to register the name. Only one business name can be reserved at a time by an individual, and the reservation can be cancelled by submitting an application to the registrar. However, the state fee paid for the reservation is not refundable, as the decision on the name’s usability is final.
Seeking tailored guidance on the new Commercial Code provisions and other corporate matters? Contact our Senior Associate, Kati Pino.
ENFORCEMENT PROCEDURE CHANGES
Estonia is set to introduce a new, centralised enforcement register on January 1, 2024. This development aims to streamline the current enforcement process and provide a comprehensive solution for procedural participants.
The centralised enforcement register is designed to amalgamate the functionalities of the existing enforcement procedure register and the electronic seizure system. This integration will create a comprehensive database for all enforcement procedures, claim fulfillments, and imposed seizures. The primary objective of this register is to offer a one-stop solution for procedural participants.
The register intends to be a significant improvement over the current system, where obtaining detailed information about enforcement procedures and seizures is a cumbersome process, often requiring individuals to make requests through multiple channels.
Public and third-party access to the register is another significant feature. While public authorities can access data for fulfilling public-law tasks, third parties, such as those needing to assess an individual’s payment discipline, can also retrieve necessary information. The enforcement register is also expected to benefit credit institutions, which can keep tabs on the persons who have applied for loans.
Implication for debtors based on VAT increase
From 2024, the increase in the VAT rate from 20% to 22% will also raise the liabilities of debtors in enforcement proceedings. The fee for the bailiff and the enforcement costs are subject to VAT. If a debtor pays the claim under enforcement along with the bailiff’s fee within 2023, it will be cheaper than paying after the start of 2024 due to the VAT rate change. This also affects obligations where the deadline for voluntary payment given by the bailiff falls in 2024. Specifically, VAT is added to the bailiff’s fee and enforcement costs, and on January 1, 2024, the VAT rate for the unpaid portion of fees and enforcement costs will be recalculated in all ongoing proceedings.
Amendments have been introduced to the Code of Enforcement Procedure, introducing the concept of registered partnership. In light of this, the rights and obligations of registered partners must be taken into account during enforcement proceedings, including the regulation of the recovery of joint property of registered partners.
Whether you need clarification on the new enforcement procedure changes or advice on other debt-related matters, our Associate, Kaire Sepper, is your trusted advisor.
Employment law changes: Providing rest time for employees
A recent decision by the European Court has changed the interpretation of rules regarding daily and weekly rest periods. Under Estonian employment law, an employee must have at least 11 consecutive hours of rest every 24 hours, which is the minimum daily rest period. Employees are also eligible for minimum weekly rest, which varies depending on whether the employee works under a summarised work time system or not. For employees with daily work time accounting, the rest period must be at least 48 consecutive hours per week. For employees with summarised work time, the minimum rest period is 36 consecutive hours per week.
Previously, the daily rest period was considered part of the weekly rest period. However, the Court of Justice of the European Union has clarified that the rights to daily and weekly rest periods, as outlined in the European Parliament and Council Directive on certain aspects of the organisation of working time, are two separate rights with different objectives. Therefore, it’s important to ensure that employees can effectively use these rights. The Court determined that the daily rest period should be added to the weekly rest period to provide better health protection for workers.
This new interpretation of the directive does not impact individuals working eight hours a day from Monday to Friday. However, it may change the work arrangements for those working on a schedule. In addition to the weekly rest period of 36 or 48 hours, the minimum requirement for daily rest of 11 hours must be added, resulting in a total of 47 or 59 consecutive hours of weekly rest time.
To know more about this and for advice on other employment-related matters, please contact our Associate, Kristel Tael-Same.
The EU AI Act
The European Union (EU) has taken a significant step towards regulating the development, placing on the market, and usage of artificial intelligence (AI) systems with the introduction of the EU Artificial Intelligence Act (AI Act). This landmark piece of legislation aims to establish a risk-based approach to AI regulation, classifying AI systems based on the potential risks they pose: limited risk, high risk, and prohibited risk.
The AI Act establishes a risk-based approach to AI regulation, classifying AI systems into three categories. Limited risk AI systems are subject to general transparency requirements, while high-impact general purpose AI systems and prohibited risk AI systems face additional obligations and bans, respectively.
The AI Act was first proposed in 2021 and after heated debates, a political deal was finally established in December 2023, covering all major aspects of the upcoming AI Act. The full text of the AI Act is expected to be published soon, with the Act slated to enter into force in Q1 2024. The AI Act will have a 12 to 24-month implementation period, with obligations becoming effective in steps.
The Act outlines a robust enforcement framework, with fine thresholds ranging from 7.5 million euros or 1.5% of global turnover to 35 million euros or 7% of global turnover for non-compliance. The fines are tiered based on the severity of the infringement and the size of the company. This strong enforcement framework is essential to deter non-compliance and ensure that the AIA is effective in protecting citizens’ rights and promoting responsible AI development and use.
Enforcement of the Markets in Crypto-Assets Regulation
The EU Markets in Crypto-Assets Regulation (MiCAR) is set to come into effect in two parts. The first part related to asset-referenced tokens (Title III) and e-money tokens (Title IV) will come into force in June 2024. The remaining provisions, including the requirements for issuers of crypto-assets other than asset-referenced tokens or e-money tokens and for the providers of crypto-asset services will come into force at the end of 2024. The technical consultation packages are already partially published, with the third package set to be published at the start of 2024.
The grand-fathering clauses may extend the right of the existing regulated providers of services to remain on the market up until July 2026, but the decision on its implementation is subject to the decision of the EU Member States’ Parliaments. The Estonian government is yet to come up with a proposal for the parliament to adopt.
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