Yes, your company can hire employees, both inside and outside Estonia. There are several possibilities:

Hiring Professionals

If your employees are or can become, professionals or freelancers in their countries of residence, this is a good option for your business. In that case, even if you sign a work contract with them, these professionals will issue invoices regularly for their work, that is, you will not pay them a salary, but an invoice for their services.

Your company will declare these invoices as expenses, which means that being money reinvested in the company, it will be tax-free. Another advantage is that these people will be contributing to their social security and pension as professionals in their countries.

Hiring Them as Employees

Another option is to hire employees. We must distinguish between employees in Estonia and outside Estonia.

Hiring Employees From Estonia

If the employees are residents in Estonia, the situation is very simple. These are Estonian workers hired by an Estonian company. This implies that your company will have to pay a series of taxes for them, as well as social security, like any European employee.

The great advantage is that these workers will be contributing to social security and pension, in a situation of absolute regularization.

Hiring Employees From Outside Estonia

Your company in Estonia can also hire employees outside Estonia. However, if these employees live permanently in some other country, you will have to take into account a number of factors.
First of all, since you are not a resident of Estonia, you will not be contributing to social security or your pension. This means that you do not pay more taxes than the salary assigned to them in full, but also that, depending on their country of residence, these people will not have access to public health or pension.

You must be very transparent with your employees and inform them of this situation. One possibility is to contribute an extra to your salary to provide them with private medical insurance and a private pension scheme. Of course, this is an agreement between the employee and your company.

Another aspect to consider is whether the employee’s activity can trigger a permanent establishment in his country of residence. As a general rule, the permanent establishment only occurs due to the presence of an office or physical location, or the activity in the country of a majority of members of the board with the capacity to conclude contracts on behalf of the company.

This means that having a member of the support team, for example, in another country, generally does not imply a permanent establishment of any kind. In fact, in some European countries, there have been court rulings that supported this criterion.

However, each country has different fiscal and tax laws, and in some nations, it is possible that the criteria for determining what constitutes a permanent establishment is completely different. It is advisable, if you hire employees in a country other than Estonia, to consult a local lawyer or ask at the Tax Office.

When hiring employees in other countries outside of Estonia, including the shareholders or members of the board of the company, you must be careful to observe certain legal aspects.

Sometimes, such as when hiring employees in Europe (and other countries), your Estonian company may need to pay social security or some kind of social taxes for those employees.

If that happens, you have several options, such as asking the employees to become professionals or freelancers (in that situation, you do not pay them salaries, but they invoice your company every month) or that the company registers as a taxpayer in their countries and pays social taxes in the employee’s country.

Down below, we talk about the legal aspects to take into consideration when hiring employees. It is important that you read that if you are hiring employees who live outside of Estonia.

Considerations When Hiring Employees

An Estonian company offers a lot of flexibility. You have a borderless business that allows you to operate globally. That includes hiring employees from any country. However, there are some important legal aspects you need to consider when hiring employees, to be sure you are compliant with both the laws of Estonia and the laws of the country where your employees live.

In short, the most important aspect to take into account to hire employees is where they live or, to be more correct, where they are tax residents. Most countries (with the exception of the US) apply residence-based taxation. That means their citizens are considered tax residents of that country if they live in the country for 183 days or more a year, although this may vary in some countries.

This article applies to both members of the company (board members, shareholders) and to external employees.

So the main question you need to ask is: where is this person a tax resident?

Let’s see the options:

Hiring Employees From Estonia

Hiring employees from Estonia is one of the easiest situations (from an administrative point of view). Your employee is living in Estonia, and working for an Estonian company. You will pay full taxes for the salary of the employee, including all social benefits, such as healthcare, unemployment benefits, pension schemes, etc.

That means you will pay social tax and income tax for the whole salary of the employee. In that case, contact us to let us know that we need to calculate the correct taxes and additional fees for this employee.

Hiring Employees Without Tax Residence

Digital nomads, location independent entrepreneurs, perpetual travelers, they don’t usually have a tax residence. That means they don’t spend enough time in any country to be considered tax residents there. In that situation, they don’t need to pay taxes for their salaries anywhere. They are not under any obligation to adhere to a series of social benefits from any government.

In that case, not only your company is not required to pay taxes for this employee, but the employee does not have to pay taxes for this salary anywhere. This is a very simple situation from an administrative point of view also, but it has an important twist. It is advisable to include a clause in the contract where the employee certifies that he or she does not have any tax residence, and the obligation to notify the employer (your company) in case the residency of the employee changes.

That will ensure that if the employee becomes a tax resident of a country in the future, your company will be notified to be compliant with the laws of that country. To understand why, we need to talk about the most complex employment situation: employees living (and being tax residents) of a country other than Estonia.

Hiring Employees From Outside of Estonia

As we discussed before, the Board Member Salary pays taxes in Estonia, because it is considered that the job is taking place in Estonia. However, the employee salary does not pay taxes in Estonia if you live and work outside of Estonia. Here, the emphasis “In Estonia” is important.

The e-Residency program of Estonia was designed for location independent entrepreneurs. As non-tax residents of any country, they don’t need to submit personal tax reports or bother about local labor laws when their companies pay their salaries.

If the employee is a tax resident of any country, things are different. Some countries require you to declare the employment status of this employee and pay social taxes for him or her. That is especially true for European countries. If you are employing people from France, Italy, Spain, or Germany, European laws dictate that you need to pay social taxes and the applicable social benefits for this employee.

A similar situation may happen in other countries as well, such as Ukraine, or El Salvador, to name but a few. It is always recommended to consult a local tax advisor or accountant in the country where you are going to hire your employees to know all the legal details beforehand.

So what can you do if you are required to pay social taxes for your employees in another country, or you can’t simply employ them and pay their salaries? Well, there are three main options.

First, your company can register as a social taxpayer in the country where your employees live. This may or may not require your company to be registered or open a branch in the country. In Estonia, for example, a foreign European company can easily become a taxpayer and start paying social taxes for Estonian employees without needing to register as a company or branch in Estonia.

Secondly, your employees could register as freelancers or professionals in their respective countries. In that scenario, you won’t be paying them salaries. They will invoice you for their services every month. This is the most optimal solution for many reasons. They are in charge of submitting their tax reports in their countries, they get access to all social benefits, including healthcare and pension scheme, and your company pays zero taxes for them.

Finally, for European members of the board, you can opt to pay yourselves a full board member salary (100%), that pays taxes in Estonia. Thanks to European double taxation treaties, you are not required to pay social taxes twice, so if your work is considered to happen in Estonia, you will pay Estonian social taxes, and don’t need to pay additional taxes in the country where you live. This may apply to non-European board members as well if their countries have taxation treaties with Estonia.

As mentioned, it is always a good idea to talk to a local tax advisor or accountant to make sure the solution you choose is completely compliant with the laws of that country.

Permanent Establishments

Another aspect to consider is whether the employee’s activity can trigger a permanent establishment in his country of residence. As a general rule, the permanent establishment only occurs due to the presence of an office or physical location, or the activity in the country of a majority of members of the board with the capacity to conclude contracts on behalf of the company.

This means that having a member of the support team, for example, in another country, generally does not imply a permanent establishment of any kind. In fact, in some European countries, there have been court rulings that supported this criterion.

However, each country has different fiscal and tax laws, and in some nations, it is possible that the criteria for determining what constitutes a permanent establishment are completely different. Again, it is advisable, if you hire employees in a country other than Estonia, to consult a local lawyer or ask at the Tax Office.

Conclusion

In this article, we explained some important legal considerations when hiring employees for your company in Estonia. Estonia is the perfect solution for a global company or startup, or for location independent entrepreneurs. But always make sure to comply with the local laws of the countries where your business operates, and that includes especially your company’s employees.

Note: this article contains legal considerations when hiring employees for your company in Estonia obtained thanks to the information from this post from Micropreneur Life.