A key aspect in this situation is the place of work specified in the employment contract. Since the work is performed abroad, Estonia cannot be considered the place of work, which means that per diems and other typical expenses related to business trips (such as travel and accommodation costs) cannot be regarded as business expenses because this is not a business trip. If employees are leased to a foreign company or are working at a foreign site, their assignments start from the location of the client company, and the term “seconded employee” applies. Very often, efforts are made to minimize salary costs by paying per diems; however, according to the Estonian Tax and Customs Board (Maksu- ja Tolliamet), per diems are considered retroactively as salary income. Only in very specific cases can labor leasing involve business trips with tax-free per diems. Since case law and tax authority positions may vary in interpretation, it is advisable to request a written clarification from the tax authority before sending employees on long-term foreign assignments.
It is often said that for mobile work, per diems can be paid. It is definitely true that, for example, a construction worker’s work is not of a mobile nature; movement occurs during the completion of a project. However, for international freight drivers, their work is indeed mobile, so paying tax-free per diems is possible.
Leasing employees abroad may seem very attractive; however, it is important to note that working abroad entails different obligations for the employer regarding employee wages and taxation. For example, when signing a subcontractor agreement (which usually comes from trade unions), the main contractor may require that a branch be registered in the relevant country first, employment contracts be drafted according to local laws, and employees be registered with the local tax authorities and taxed on their wages under all applicable foreign taxes. If these steps are not taken, then in cases where the work location is outside Estonia, working conditions generally must meet at least the minimum standards set by the host country. These standards include minimum wage requirements—meaning that even under an employment contract governed by Estonian law, an employee must be paid at least the minimum wage established in the host country—as well as working hours, rest periods, and occupational safety requirements.
In addition to general standards of another country, there may be legal rights for taxing an employee’s wages when they are sent to work in another country. For each individual case, it is necessary to assess circumstances and review tax treaties; however, there are some general rules regarding taxation of wages abroad:
- Income tax paid by an employee usually goes to another country if:
- The wages are paid by a company based in another country; or
- The wages are paid by a company with a permanent establishment (PE) in another country (where activity constitutes a significant part of its overall operations); or
- The employee works more than half of their days in another country during any 12-month period—not calendar year.
- For Finland, Sweden, Denmark, Norway, and Iceland—due to existing tax treaties—income tax must be paid to the other country when moving employees.
- Within the EU/EEA countries, social security contributions are paid where the employee primarily works.
- If a business trip lasts less than 24 months, it is possible to continue paying social security contributions in Estonia by obtaining an A1 certificate from the Estonian Social Insurance Board—confirming ongoing social security coverage in Estonia.
- When social security contributions are paid to another country, employees retain rights derived from that country's social security system—such as health benefits and pension years.
- Employees working abroad for several months must declare their income earned abroad in Estonia; they can deduct social security contributions paid abroad. If foreign income tax paid is less than what would have been payable in Estonia, they must pay additional income tax to Estonia.
- There may also be an obligation to submit an income declaration in the foreign country.
As seen above, sending employees abroad involves many additional obligations and risks. What initially seems very attractive can ultimately lead to losses. Therefore, before making such offers or taking such steps, it is essential first to consult with a specialist and then carefully calculate income and expenses while considering obligations. Wishing you successful endeavors without unforeseen consequences!
