Benefits that employers can offer tax-free
June 2023
The current economic challenges, such as high inflation, scarce resources and pressures to increase profitability, continue pushing businesses towards a global dilemma: either motivate your employees to stay on with a pay rise and then say goodbye to your profit, or cancel your plans for higher pay and perks and then lose skilled workers. This dilemma might cause you to look for some more efficient types of employer’s financial support with a low or no tax burden, such as non-taxable fringe benefits. This article offers an overview of exempt fringes and other useful tools that employers can use to support their workers in the Baltic States.
Why is employer’s financial support needed?
As the Great Resignation goes on1, the international labour market has become increasingly unstable as a result of the pandemic and high inflation rates. Supporting the financial wellbeing of your employees is crucial to helping them with the rising cost of living, which has already caused them a lot of stress2. A lack of support causes tension among employees, with recent surveys failing to provide the desired consolation: workers insist on a pay rise. Moreover, PwC’s survey “Global Workforce Hopes and Fears”3 shows that 71% of workers consider leaving for another job where they will earn more. So the employers need to hold all the cards to satisfy their workers and stay profitable at the same time. Under these circumstances, exempt fringe benefits are the golden mean, as they can play an important role in motivating your employees to keep working for your company without any further tax liabilities. This means the same corporate budget gives the worker a higher net benefit.
ESTONIA
An overview of Estonian non-taxable fringe benefits
The Estonian Income Tax Act prescribes several benefits that employers may provide to their workers free of tax if certain conditions are met. Fringes provided in this way are not taxable in the employee’s hands. Here’s a list of common exempt fringes:
Expenses incurred in improving employees’ health up to EUR 100 per worker quarterly if the employer has enabled these for all the staff. Examples of such expenses include a participation fee in public sporting events, regular use of sporting venues, and insurance premiums under a sickness insurance contract.
Stock option agreements if all the conditions for a tax exemption are met.
Compensation for the business use of a private car. The allowance is EUR 0.3 per km but not to exceed EUR 335 a month. The worker must keep trip records.
Compensation for public transport fares that employees pay to commute between their place of residence and place of work. Compensation for other fares is not taxed as a fringe benefit if it’s impossible to make the journey using public transport with a reasonable expenditure of time and money.
The employer’s business expenses for a worker’s accommodation if two conditions are met
1 ) The employee’s place of residence is at least 50 km away from their place of work and they do not own any residential property located closer to their place of work, and these conditions are met throughout the period of accommodation.
2) Accommodation expenses per employee are up to EUR 200 per calendar month in the case of Tallinn or Tartu, and EUR 100 in other cases.
LITHUANIA
An overview of Lithuanian non-taxable fringe benefits
Lithuanian PIT rules list several benefits that may be provided to employees free of tax. Some of the most popular exempt perks are:
Insurance payments, including private health insurance and life insurance premiums, and employee pension fund contributions may be exempt if their overall value does not exceed 25% of the person’s employment income for the calendar year. For health insurance it’s also important to ensure the funds are used for medical services in licensed clinics or to purchase medications at pharmacies.
Gifts and prizes worth up to EUR 200 a year are exempt. For instance, employers can give their workers Christmas presents worth up to EUR 200 per person.
Contributions the employer pays directly to an educational institution for a worker’s higher education may be exempt. Also, upskilling courses and staff training courses/seminars that are directly related to their job duties are exempt.
Employers may pay public transport fares for workers’ trips to their place of work free of tax. This rule applies to public transport only and does not cover taxis, private chauffeurs or private cars.
LATVIA
An overview of Latvian non-taxable fringe benefits
The Personal Income Tax (PIT) Act prescribes a range of tax-free benefits that employers can provide to their workers. Fringes that are exempt from PIT are also exempt from social insurance contributions. Here’s a list of common exempt fringes:
Employer contributions to a workers’ pension fund and endowment assurance premiums up to 10% of the person’s taxable income. The insurance contract must be for a minimum of ten years.
Employer-paid health and accident insurance contributions up to 10% of the person’s taxable income, capped at EUR 426.86 a year.
Tax-free scholarships for trainees under specific conditions, as well as meals and medical (wellbeing) expenses up to EUR 480 a year. There are certain criteria the employer must meet, such as having the required number of workers and signing a collective agreement.
Awards such as a letter of recognition, honour or gratitude, and a diploma, medal or cup. Employers may also give tangible gifts that will not be taxed if their value is up to EUR 15.
Organising team-building events. These will be exempt from corporate income tax if their costs for the reporting year do not exceed 5% of the total gross wages calculated for employees in the previous reporting year for which social insurance contributions have been paid.
Royalties
Apart from a tax exemption, it’s also possible to provide several fringe benefits with a lower tax exposure, e.g. a company car that is subject to a special monthly tax, or a car rented from an employee paying a 10% PIT on the agreed rent. Under the PIT Act, employees may also be rewarded for activities that are covered by royalty rules. This applies if an employee is engaged in intellectual work, with a reduced tax covering PIT and social insurance contributions of 25% (up to EUR 25,000 in royalties a year) or 40% (over EUR 25,000 in royalties a year). There are plans to require all royalty recipients to register their economic activity from 2024, but there is also a chance that the current rules will still apply. Taxpayers will then choose to pay taxes under general procedure (PIT plus social insurance contributions). Opting for the microbusiness taxpayer scheme will mean the same tax exposure as currently.
Conclusion
Each Baltic country has its own range of exempt fringe benefits, which are subject to various restrictions on their use, including limits and other specific conditions. It’s important to note that the diversity of fringes is becoming increasingly popular among workers, which requires today’s packages to be flexible and adaptable to each individual worker. In this situation, employers should consider all opportunities that allow their workers to make the most of tax-free perks, while paying particular attention to statutory conditions. To avoid tax risks in awarding your fringes, it’s advisable to reach out to tax professionals, who will help you design a compliant benefits package that meets today’s standards.
Learn more about flexible fringe plans and their advantages in our article of 9 May: https://mindlink.lv/implementing-flexible-reward-scheme-one-step-closer-to-better-employer-status-11923
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