There are several important and complicated matters with sending an employee to work abroad. Starting with the issues whether it can be considered a business trip or renting of the workforce and ending with the issues about which type of taxes to which state should be paid. On February 9th 2011 the Estonian Supreme Court has made the decision (RK 3-3-1-86-10) where the Estonian Tax and Customs Board made a notice of assessment where it requires payment of additional charges with the approximate amount of 2 million Estonian kroons, as company E interpreted incorrectly employees’ working abroad as a business trip.
Supreme Court agreed with the opinion of the lower judicial authorities that agreements about working place in the contract of employment do not coincide with the reality and the working place should be considered a foreign state. Therefore, there was not the consignment to business trip with appropriate taxation proceedings. Court had the opinion that the purpose of inserting Estonia into the work agreement as the place of working was to avoid taxation on fringe benefit on real payments and make the payments in a form of compensation of business trip costs and daily allowance by paying no taxes.
Estonian Taxation Act par. 84 provides that “if it is evident from the content of a transaction or act that the transaction or act is performed for the purposes of tax evasion, conditions that correspond to the actual economic content of the transaction or act will apply upon taxation.” Therefore, it is not enough that the business contract is compiled properly and legitimately – it also has to reflect the actual purpose of the contract. During the interpretation of a contract and determining the tax obligations, the actual situation is considered, not the wording of the contract.
Therefore, if a company interprets it’s employees’ working abroad incorrectly as a business trip and makes the payments in the form of a compensation of the business trip costs and daily allowances, thus paying no taxes, the Estonian Tax and Customs Board’s supervision can demand additional tax payments in an ex-post form.
Suggestions to the employer:
Before the compilation of a business trip it should be made clear whether this actually is a business trip or whether it can be considered as a case of working abroad. If it can be interpreted as a business trip it should be correctly put into formal order. In the case of a business trip the supporting documents should be gathered. There have been cases where business trip has been excluded because of the fact that the employee was travelling with a tourist travel contract – in this cases the business trip has to be proved by documents.