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TALKING TAX: Estonian tax board targets self-employed

Aug 22, 2007
Paul Kunnap [Sorainen Law Offices]

Tax officials in Estonia recently turned their attention to various a r r a n g e m e n t s designed to avoid paying social taxes. In particular, the Tax Board has been focusing on self-employed persons and proprietorships offering services to a single client. The board is seeking to reclassify these arrangements as employment relations and requiring the client to pay a social tax on the service fees. Last October the board issued a warning against the increasing trend of replacing employees with self-employed persons.

The board then claimed that it suspects that in 1,700 cases involving selfemployed persons the service actually corresponds to an employment relation and is subject to reclassification by the board. Businesses prefer having service agreements with self-employed persons in lieu of employees to save money 's i.e., to avoid social taxes. When obtaining services from self-employed persons, the client only pays the service fees; the social tax would be paid by the self-employed person, who can make deductions from the taxable base.

Additionally, businesses often try to avoid the cumbersome and inflexible regulations regarding employment relations. We are aware of several probes launched by the Tax Board this year to investigate single-client service arrangements involving both self-employed persons and companies with a single shareholder, management board member and employee.

The most prominent of these investigations involves Eesti Post, where the Tax Board is reportedly claiming 7.2 million kroons (460,000 euros) in back taxes for 2005. While this matter has not yet been resolved and is likely to end in court, Eesti Post has already made statements regarding changing their practices.

In determining whether a service relationship is in fact an employment relationship the following issues should be considered: (i) whether the service is provided by a specific person; (ii) whether the person's service to the client is exclusive; (iii) who organizes and manages the work process; (iv) to what extent the person is expected to follow the internal work regulations and procedures of the client; (v) who determines the time, place and manner of work; (vi) who carries the risk related to the work; (vii) who pays for the equipment used for work; and (viii) how profit is shared. Given the increase of less traditional forms of working, it is acknowledged in legal literature that the questions given above can only be indicative, and the main criterium in determining the nature of the relationship is the level of dependency of the person vis-a-vis the employer.

Furthermore, the rule-of-thumb when interpreting employment law is that if in doubt, the relationship is deemed to be employment relationship.

Paul Kunnap is a senior associate at Sorainen Law Offices in Tallinn
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