TALKING TAX: Estonian tax board targets self-employed

  • 2007-08-22
  • Paul Kunnap [Sorainen Law Offices]
Tax officials inEstonia recentlyturned their attentionto variousa r r a n g e m e n t sdesigned to avoid paying socialtaxes. In particular, the Tax Boardhas been focusing on self-employedpersons and proprietorships offeringservices to a single client. Theboard is seeking to reclassify thesearrangements as employment relationsand requiring the client topay a social tax on the service fees.Last October the board issued awarning against the increasingtrend of replacing employees withself-employed persons.

The boardthen claimed that it suspects thatin 1,700 cases involving selfemployedpersons the service actuallycorresponds to an employmentrelation and is subject to reclassificationby the board.Businesses prefer having serviceagreements with self-employedpersons in lieu of employees tosave money 's i.e., to avoid socialtaxes. When obtaining servicesfrom self-employed persons, theclient only pays the service fees;the social tax would be paid by theself-employed person, who canmake deductions from the taxablebase.

Additionally, businesses oftentry to avoid the cumbersome andinflexible regulations regardingemployment relations.We are aware of several probeslaunched by the Tax Board thisyear to investigate single-clientservice arrangements involvingboth self-employed persons andcompanies with a single shareholder,management board member andemployee.

The most prominent ofthese investigations involves EestiPost, where the Tax Board isreportedly claiming 7.2 millionkroons (460,000 euros) in back taxesfor 2005. While this matter has notyet been resolved and is likely toend in court, Eesti Post has alreadymade statements regarding changingtheir practices.

In determining whether a servicerelationship is in fact anemployment relationship the followingissues should be considered:(i) whether the service is providedby a specific person; (ii)whether the person's service to theclient is exclusive; (iii) who organizesand manages the work process;(iv) to what extent the person isexpected to follow the internalwork regulations and procedures ofthe client; (v) who determines thetime, place and manner of work;(vi) who carries the risk related tothe work; (vii) who pays for theequipment used for work; and (viii)how profit is shared.Given the increase of less traditionalforms of working, it isacknowledged in legal literaturethat the questions given above canonly be indicative, and the maincriterium in determining thenature of the relationship is thelevel of dependency of the personvis-a-vis the employer.

Furthermore,the rule-of-thumb wheninterpreting employment law isthat if in doubt, the relationship isdeemed to be employment relationship.

Paul Kunnap is a senior associate atSorainen Law Offices in Tallinn